why the deficit doesn`t matter why the deficit doesn`t matter

Transcription

Dollar bears beware
WHY THE DEFICIT
DOESN’T MATTER
• MULTIPLE
trend-signal setups
• TRADING WITH
Fibonacci fan lines
• DOLLAR-YEN
heats up in March
• CAN THE BRAZILIAN REAL
keep flying high?
• COMMODITY
CURRENCY OUTLOOK
CONTENTS
In This Issue . . . . . . . . . . . . . . . . . . . . .6
Contributors . . . . . . . . . . . . . . . . . . . . .8
Global Economic Calendar . . . . . . .10
Industry News
By Carlise Peterson
Royal Bank of Canada accused of
driving down value of NZD . . . . . . . .12
RBC suspends three FX traders for allegedly driving down the NZD
COESfx expands to Asia . . . . . . . . . .12
Currency ECN expands reach.
CME FX on Reuters opens
for business . . . . . . . . . . . . . . . . . . . .13
The future-spot partnership takes its first
steps.
Global Economy
Brazilian real dancing
to bullish beat . . . . . . . . . . . . . . . . . .14
A look at the Brazilian real’s prospects for
the remainder of the year.
By Currency Trader Staff
ECB likely on hold
for the near term . . . . . . . . . . . . . . . .15
Central Bank looking to control inflation.
By Currency Trader Staff
Is the bloc party over? . . . . . . . . . . .16
Are the commodity currencies pausing or
peaking?
By Carlise Peterson
Currency Strategies
Fibonacci fan lines . . . . . . . . . . . . . .18
How to calculate Fibonacci fan lines and
use them in conjunction with standard
retracement levels.
By Cornelius Luca
continued on p. 4
2
April 2005 • CURRENCY TRADER
CONTENTS
Using multiple trend-change
signals . . . . . . . . . . . . . . . . . . . . . . . .22
A look at how three short-term
trend-reversal indicators interact.
By Russell Arthur Lockhart, Ph.D.
The Big Picture
Who’s afraid of the big,
bad deficit? . . . . . . . . . . . . . . . . . . . .24
Traders should be aware the U.S. current
account deficit does not necessarily dictate
the movement of the U.S. dollar.
By Marc Chandler
Currency System Analysis
MACD system . . . . . . . . . . . . . . . . . .28
Global News Briefs . . . . . . . . . . . . .36
Currency Futures . . . . . . . . . . . . . . .37
Forex Resources . . . . . . . . . . . . . . . .38
Upcoming Events . . . . . . . . . . . . . . .39
Spot Check
Will the dollar-yen rise again? . . . . .32
Key Concepts and Definitions . . . .40
International Market Summary . . .34
Forex Trade Diary . . . . . . . . . . . . . . .42
Have a question about something you’ve seen in
Currency Trader?
Submit your editorial queries or comments to
[email protected].
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visit www.currencytradermag.com/ziniohelp.htm.
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Global markets and economics:
• In “Who’s afraid of the big, bad, deficit?” Marc Chandler tackles the
dollar-deficit conundrum from another angle — that today’s economy is
being measured with yesterday’s tools, and the current dollar worries
vis-à-vis the deficit are based on mistaken beliefs.
• “Brazilian real dancing to bullish beat” takes a look at one of the hottest
markets of the past year. Brazil’s economic fundamentals (they recently
graduated from IMF nursing) have many traders believing the country’s
currency, the real, is in a good position going forward — recent weakness
notwithstanding.
• The Euro outlook was a key story (“Has the Euro topped?”) in the March
issue of Currency Trader, and the currency pulled back last month after falling
short of its Dec. 2004 high. This month, we take a look at what the European
Central Bank (ECB) has been doing — and its probable game plan going
forward — in “ECB likely on hold for the near term.”
Trading strategies, analysis and market commentary:
Advertise in All 3
• This month’s Spot Check sizes up the current dollar-yen scenario. After
flirting with the 100 level, the dollar-yen has bounced higher in 2005
(especially in the last couple of weeks). Crunching a few numbers provides a
framework for operating in this currency pair in the near future. Also, a
complementary Forex Trade Diary illustrates a trade in the dollar-yen that
caught the recent upswing.
• This month’s Currency System Analysis tests a trading system based
on one of the best-know technical indicators — moving average
convergence-divergence (MACD) — on a forex portfolio.
• Strategy articles cover techniques using Fibonacci fan lines and a multiple
trend signal technique.
Industry and market news:
Contact Bob Dorman
Ad sales East Coast and Midwest
[email protected]
(312) 775-5421
Allison Ellis
Ad sales West Coastand Southwest
[email protected]
(626) 497-9195
Mark Seger
Account Executive
[email protected]
(312) 377-9435
• In a widely anticipated linkage between the spot forex and currency futures
worlds, the Chicago Mercantile Exchange (CME) and Reuters launched their
joint CME FX on Reuters platform on March 14.
• The Currency Futures page gives the latest trading statistics and news from
the world of exchange-traded futures.
• The Global Economic Calendar provides a roundup of the most important
trading dates this month.
6
CONTRIBUTORS
CONTRIBUTORS
A publication of Active Trader ®
For all subscriber services:
www.currencytradermag.com
Editor-in-chief: Mark Etzkorn
[email protected]
Managing editor: Molly Flynn
[email protected]
Associate editor: Carlise Peterson
[email protected]
Associate editor: David Bukey
[email protected]
Contributing editor: Jeff Ponczak
[email protected]
Editorial assistant and
Webmaster: Kesha Green
[email protected]
Art director: Laura Coyle
[email protected]
President: Phil Dorman
[email protected]
Publisher,
Ad sales East Coast and Midwest:
Bob Dorman
[email protected]
Ad sales
West Coast and Southwest only:
Allison Ellis
[email protected]
Classified ad sales: Mark Seger
[email protected]
Volume 2, Issue 4. Currency Trader is published monthly by TechInfo, Inc.,
150 S. Wacker Drive, Suite 880, Chicago, IL 60606. Copyright © 2005
TechInfo, Inc. All rights reserved. Information in this publication may not be
stored or reproduced in any form without written permission from the publisher.
The information in Currency Trader magazine is intended for educational purposes only. It is not meant to recommend, promote or in any way imply the
effectiveness of any trading system, strategy or approach. Traders are advised
to do their own research and testing to determine the validity of a trading idea.
Trading and investing carry a high level of risk. Past performance does not
guarantee future results.
8
Marc Chandler is the head of
Terra K Partners, a financial advisory
firm, and associate professor at New
York’s School of Continuing and
Professional Studies, where he teaches
courses on international political economy. From May 2001 through Oct. 1, 2004
he was chief currency strategist at
HSBC Bank USA. Prior to HSBC, he was
the chief currency strategist at Mellon Financial, a senior
currency strategist at Deutsche Bank, and the director of
research at EZA Associates, a hedge fund in the early 90s.
Chandler has been published in Euromoney, Corporate
Finance, Foreign Affairs, Barron’s, International Treasurer, FX
Week, and the Financial Times. He has been a regular guest
on CNBC and CNNfn. He has an MA in American history from Northern Illinois University and a master’s in
public and international affairs from the University of
Pittsburgh, where he specialized in international political
and economic studies.
Cornelius Luca is the author of Technical Analysis
Applications (2004, McGraw-Hill), Trading in the Global
Currency Markets (2000, Penguin Books, second edition),
Technical Analysis Applications in the Global Currency
Markets (2000, Penguin Books, second edition), and
Introduction to Technical Analysis (1997, Euromoney). He
also provides daily technical assistance to Global Forex
Trading.
Michael Schneider has been involved in trading
since 1982 when he was head of the special interest group
investments of the German Apple user group and operated one of the first low-cost quote vendors in Germany.
He later incorporated a small trading company that
served clients in Europe (primarily Monaco). Currently
he is head of the supervisory board of a German stock
firm and director of a second company that manages
international projects. In addition, he manages the office
of the German Vereinigung Technischer Analysten e.v.,
which is the German member of the International
Federation of Technical Analysts.
Russell Arthur Lockhart, Ph.D. ([email protected]), is co-analyst at Undergroundtrader.com, a
worldwide active trader chatroom, voted Forbes Best of the
Web four years in a row. Dr. Lockhart co-authored the books
The Undergroundtrader.com Guide to Electronic Trading and
Secrets of the Undergroundtrader, both published by McGraw
Hill.
CMC01268_CurrencyTrader_02.qxd
4/6/05
9:57 AM
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APRIL
GLOBAL ECONOMIC CALENDAR
Monday
Tuesday
Wednesday
Thursday
Friday
Saturday
2
1
U.S.: Employment; ISM
report on business
Japan: Account balances
Germany: Retail turnover
Australia: Index of
commodity prices
4
5
Japan: Monetary
base
6
7
8
Great Britain:
Monetary Policy
Committee meeting
U.S.: Wholesale inventories
ECB: Governing council meeting
Great Britain: Monetary Policy
Committee meeting
Germany: Production index
Australia: Official reserve assets
Germany:
Foreign trade
Germany: Orders
received and manufacturing turnover
9
11
12
13
14
15
Japan: Balance of
payments
U.S.: Trade
balance
U.S.: Retail sales
Japan: Monetary
survey
Canada:
Manufacturing
survey
Japan: Corporate
goods price index
Germany: CPI
Germany:
Bankruptcies
Italy: Balance of
payments
18
16
23
19
20
21
22
U.S.: PPI
U.S.: CPI
Canada: CPI
Canada:
Wholesale trade;
leading indicators
Great Britain:
Capital issues
U.S.: Leading indicators
ECB: Governing
council meeting
Canada: Retail
trade
27
X
28
29
XxxxxDurable
U.S.:
goods
U.S.: GDP
Canada: GDP
Germany: Retail turnover
Australia: International reserves
and foreign currency liquidity
Italy: International reserves and
foreign currency liquidity
Germany: PPI
25
X
Japan: Corporate
Xxxxx
service price index
26
X
Xxxxx
Canada:
Employment
Germany:
Employment
Legend
CPI: Consumer Price Index
ECB: European Central Bank
ISM: Institute for Supply
Management
GDP: Gross Domestic Product
PPI: Producer Price Index
The information on this page is subject to change. Currency Trader is not responsible for the accuracy of calendar dates beyond press time.
10
April9 2005 • CURRENCY TRADER
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INDUSTRY NEWS
by Carlise Peterson
Royal Bank of Canada accused
of driving down value of NZD
The Royal Bank of Canada is continuing its investigation into accusations that three of its traders
attempted to trigger stop-loss orders by driving down the value of the New Zealand dollar.
T
he Royal Bank of Canada
temporarily suspended
three foreign exchange
traders at its London
office in mid-March and forwarded the
matter to British securities regulators
after an investigation into a breach of
the company’s internal policies. A
company spokesperson says RBC is
likely to avoid serious censure by the
U.K.’s Financial Services Authority
(FSA) for the currency trading irregularity that took place in November.
RBC recently completed an internal
probe of trading activities that were
designed to drive down the value of the
New Zealand dollar. Three staff members have been suspended. The bank
also notified the FSA of its investigation.
Industry experts say RBC traders
tried to push down the value of the New
Zealand dollar to activate stop-loss sell
orders. Some of the orders can be triggered simply if one of the two major
interbank currency trading networks —
consortium-owned EBS and a system
owned by Reuters — shows a stop-loss
level as a tradable price on its screens.
Forex participants in public Web
forums say the RBC traders exploited a
well-known loophole on the systems
banks use to trade currencies with each
other. By blocking other banks’ ability
to trade on its New Zealand dollar
prices, the RBC traders were able to
post artificially low prices on the interdealer systems’ screens without the
risk they would be asked to execute at
those low rates, according to forum
discussions. The fact that the rate
appeared on the screens was enough to
activate the stop-loss orders.
12
Trading systems generally leave
banks to decide who can block trading,
and why. The systems rely on the
good faith of market participants
not to abuse that function. Trying
to push a currency down is normal practice for banks, but
doing it specifically to trigger
other people’s orders breaches informal rules in the non-regulated foreign exchange market,
says Michael Woolfolk, senior
currency strategist at the Bank of
New York.
Data from the Bank for
International Settlements indicate the New Zealand dollar
accounts for just 1 percent of
the turnover in the $1.9 trillion-a-day forex market.
Although it has oversight over the
market for options and derivatives
because they are considered investment
instruments, the FSA cannot set rules
in the spot forex market. But the FSA
can judge firms to be unfit for business if they breach guiding principles of fair conduct in the financial markets.
It is not known whether the
RBC traders did, directly or
indirectly, affect the forex
options
market
with
the
November trade. The sums
involved also have not been disclosed.
Banks involved in the forex
market hope RBC’s internal
investigation into the matter, and
the fact the FSA has been
informed, will stop similar incidents in the future because they are
eager to avoid the administrative burden of regulation, Woolfolk says. COESfx expands to Asia
C
OESfx Inc. (www.coesfxasia.com) is expanding into the Chinese
market and will provide a proprietary trading platform for Asian forex
retail traders that enables direct online trading of foreign currency.
Sometimes referred to as a “currency ECN,” the COESfx Level 1 trading
platform is an electronic currency network for the execution of foreign
exchange trades.
“The launch of COESfx Asia represents another significant milestone in the
expansion of the forex industry,” says Ronald Balzano, president of COESfx.
“Using our proprietary technology to provide a transparent environment for
forex trading, we hope to change the way people think about and execute
currency trading.”
According to the China Interbank Trade System, China’s daily trading volume represents $275 million per day. April 2005 • CURRENCY TRADER
CME FX on Reuters opens for business
T
he Chicago Mercantile
Exchange (CME) and
Reuters launched CME
FX on Reuters (www.cmeonreuters.com) on March 14. The
launch is touted by both organizations
as paving the way for more efficient
markets as the first major linkage
between sell-side traders in the interbank FX market and electronic CME
FX futures markets, where hedge
funds and other major buy-side participants play a key role.
The hookup gives the professional
interbank community trading spot
and forward products on the Reuters
platform streamlined access to the
most active currency futures market in
the U.S.
Buy-side investors are increasingly
active in the $1.9 trillion/day foreign
exchange market but many lack the
size and credit standing to trade
with bigger players on the
interbank market. Currency
trading activity at the CME
has been rising steadily and
now accounts for around five
percent of the exchange’s total
volume.
“In February average daily volume
in CME’s FX complex increased 49
percent to more than 266,000 contracts,
with a notional value of $35 billion,”
says Rick Sears, Managing Director of
the CME Foreign Exchange.
Reuters and the CME unveiled the
arrangement last year and have been
conducting tests with several banks
including ABN AMRO, Bank of
America, Barclays Capital, HSBC,
Royal
Bank
of
Scotland,
Skandinaviska
Enskilda
Banken, Societe Generale, and
Fimat International Banque
SA. CME FX on Reuters anticipates other banks will soon
join the service. The new venture
now has a Web site: www.cmeonreuters.com.
The CME is also launching options
on two of their most popular currency
contracts — the Euro FX (EC) and the
Japanese yen (JY). More information
on these option contracts can be found
in our new monthly magazine, Options
Trader. Three good tools for targeting customers . . .
— CONTACT —
Bob Dorman
Allison Ellis
Mark Seger
Ad sales East Coast and Midwest
[email protected]
(312) 775-5421
Ad sales West Coast and Southwest
[email protected]
(626) 497-9195
Account Executive
[email protected]
(312) 377-9435
CURRENCY TRADER • April 2005
13
GLOBAL ECONOMY
Brazilian real dancing
to bullish beat
The fundamentals are on the side of Brazil currency, despite recent slump.
BY CURRENCY TRADER STAFF
FIGURE 1 — A REAL BIG TREND
T
he Brazilian real rocketed to a nearly three-year
high around 2.54 vs. the
U.S. dollar in late
February. Despite modest weakness in
the real through mid March, most analysts point to strong underlying fundamentals, a high interest rate environment, and stronger commodity prices
as bullish factors for the real rate
through year-end.
The Brazilian currency had
strengthened significantly vs. the dollar, from USD/BRL 3.23 in May 2004 to
the February 2005 2.54 high. Looking
back to 2002, the real was trading
around 4.00. As Rafael de la Fuente,
chief Latin American economist at
BNP Paribas notes, “We saw a huge
move since 2002 and it’s been almost a
one-way street.”
Brazil churned out solid gross
domestic product performance in
2004, delivering a 5.3 percent annual
reading, which followed 2003’s nearly
flat growth.
“The strong economic activity last
year and the structural reforms implemented by President Lula attracted
foreign investment,” explains Alfredo
Coutino,
senior
economist
at
Economy.com.
Coutino noted that Brazil attracted
the largest level of foreign investment
in Latin America in 2004 at around $18
billion.
“There is a constant flow of foreign
direct investment into Brazil,” he says.
Interest rates
and the carry trade
One factor that has especially sparked
14
Brazil’s high interest rates and other fundamental factors have attracted global
currency traders, resulting in a strong trend in the real vs. the dollar — despite
the Brazilian central bank’s attempt to cool off their currency.
Brazilian real (BRE), daily
3.60
3.40
3.20
3.00
2.80
2.60
2003
2004
2005
Source: eSignal
foreign interest in the real are Brazil’s
high short-term interest rate levels,
which have been on an upward trend.
In early March, the Brazilian central
bank hiked rates once again, bringing
its Selic rate to 19.25 percent. The central bank has been on a tightening trend
since September 2004, increasing the
rate from 16.00 percent to its current
level. Analysts expect that additional
tightening in the Selic rate will be seen
later this year, as the central bank continues to attempt to fight inflation.
“Brazilian interest rates are much
higher than almost anything you can
find anywhere else, and with the
improving fundamentals, it’s almost a
slam dunk,” says de la Fuente. “The
carry trade has been phenomenal as
more investors have piled in.”
“People who have dollars look for
good investment opportunities,” says
Albert Bernal, chief economist for
Latin America at Ideaglobal. “They see
the real as a currency with good liquidity and a great play because the
country is looking better.”
A look at the data
Overall, analysts expect Brazilian GDP
growth to be lower in 2005 (around
3.7-3.8 percent) in part because of
expectations for a deceleration of the
global economy, which will translate
into less external demand for Brazilian
exports. Bernal noted that the size of
the Brazilian GDP is estimated to be
worth around $669 billion at the end of
2005, which would be about 33 percent
of Latin American’s total GDP.
Economy.com’s Coutino notes that
inflation has been decreasing. In 2004,
consumer prices saw inflation around
the 6.2 percent level, but he is forecasting
inflation around 5.7 percent this year.
The January industrial production
figures, released in early March,
revealed a 0.5 percent pullback from
December. The data, however, was 6.0
percent higher on a year-over-year
basis. Analysts at Credit Suisse First
Boston (CSFB) noted the industrial
production trend had decelerated by
less than originally expected as the
median market forecasts had actually
called for a 1.0 percent month-overmonth decline in January and a yearover-year gain of 5.0 percent.
The CSFB Brazilian economic team
states: “In our view, industrial production has slowed to a rate we believe is
sustainable over the medium term
without exerting significant pressure
on inflation.”
Inventory building was seen in certain sectors in the early months of
2005, which sparked CSFB analysts to
upwardly revise their 2005 forecasts
for the trade surplus to $U.S. 30 billion
from $U.S. 26 billion.
Expansion in the export sector has
been a key driver behind economic
growth in Brazil. The country exports
agricultural products, including cattle
and soybeans, some minerals and electricity and oil.
“Brazil used to have trade deficits,
but currently the country is running a
$2-3 billion monthly trade surplus,”
says de la Fuente.
“High energy prices have been good
for the development of the Brazilian
economy,” adds Coutino.
Intervention
The Brazilian central bank has been
active in the open markets, buying dollars and selling reals, in an attempt to
stem the appreciation of the real. But
analysts note that as in all currency
markets with strong trends, while central banks might be able to slow them
down or smooth them out, they are
usually unable to stop them. Overall,
most economists expect the underlying
strong fundamentals to allow additional real appreciation throughout 2005.
While the real was trading around
2.75 in mid March, BNP Paribas’s de la
Fuente saw potential for the real to
move to 2.52 over the next six to nine
months.
“The trade flows are still phenomenal,” he says.
Economy.com’s Coutino noted that
last year, the Brazilian currency appreciated almost 5 percent, and he predicted that the real could see another 3
percent appreciation this year. Questions or comments? Click here.
ECB likely on hold
for the near term
Focus is on inflation rather than growth.
BY CURRENCY TRADER STAFF
W
ith relatively tame
inflation data emerging from the Euro
zone, analysts say a
tightening by the European Central
Bank (ECB) is not in the cards any time
soon. While in late 2004, some analysts
had expected a tightening sooner,
rather than later, expectations are
being pushed back as some market
watchers now project that the repo
rate may be on hold throughout 2005.
At the latest meeting on March 3, the
ECB matched the market’s expectations
with a steady monetary policy response.
The bank’s repo rate remains at a sixdecade low of 2.00 percent, well below
the U.S. federal funds rate of 2.75 percent (as of March 22), the Bank of
England’s 4.75 percent rate and the
Reserve Bank of Australia’s 5.50 percent.
This all adds up to continuing negative
interest rate differentials for the Euro in
the months ahead.
“They have zero ‘real’ short-term
interest rates,” notes Sean Callow, currency strategist at Ideaglobal. “If you
earn the 2.00 percent repo rate in the
Euro zone, you lose the whole thing
within the year to inflation.”
The ECB is set to meet next on April
7, but analysts don’t expect action out
of that meeting either.
Tepid growth prospects
At the latest ECB meeting, the board
lowered its gross domestic product
(GDP) forecast for 2005 to about 1.6
percent, down from the previously
expected 1.9 percent. However,
despite the weak growth outlook, the
ECB’s mandate is strictly focused on
inflation, not growth.
“Their mandate is not to boost the
economy, but to control inflation,”
explains Callow. “The bottom line —
their mandate is to keep inflation at 2.0
percent or under.”
The latest consumer inflation data
out of the Euro zone, the HICP,
revealed a 2.1 percent reading as of
February.
However, “inflation is seen falling
back below 2 percent this year,” notes
Stephen Webster, chief European economist at 4cast Inc.
Inside the Euro zone
Let’s take a look at some of the latest
numbers out of the euro zone, released
in early March. In France, industrial
production rose in January, in line with
most analyst’s expectations. January
industrial production rose 0.2 percent
month-over-month. Manufacturing
rose by 0.5 percent after a 1.1 percent
jump in December. In Germany,
continued on p. 17
15
GLOBAL ECONOMY continued
Is the bloc party over?
The “commodity bloc” currencies of Australia, New Zealand, and Canada were very popular
in 2004. Have these massive trends run their course?
BY CARLISE PETERSON
F
rom 2002 through 2004,
the forex market took
great interest in the “commodity currencies“ — the
Australian, Canadian, and New
Zealand dollars — so called because
their economies depend in large part
on exports of raw materials. (Some
traders and analysts include the South
African rand in the commodity bloc,
while others consider commodity currencies to be those of developing countries.) These currencies have enjoyed
great strength against the U.S. dollar in
recent times.
Australia is one of the world’s
biggest producers of gold and has
minerals and fossil fuels other than oil.
New Zealand isn’t as big a commodity
producer, but it has forest resources
and its currency tends to move in tandem with Australia’s. Canada is a
major source of oil and pulp and
paper, as well as mining and energy.
Demand from China, among other factors, has pushed commodity prices
higher and helped drive up the value
of these currencies vs. the U.S. dollar.
Australian exports to China have doubled in the past five years as it uses
more iron ore, coal, and aluminum.
However, since the beginning of this
year, the commodity bloc has been suffering. Forex strategists say the future
direction hinges on several factors,
including U.S. interest rates, Chinese
economic growth, and demand for
natural resources.
Recent internal U.S. dollar strength
can be blamed for some of the weakness in the commodity bloc so far this
year, strategists say, but global growth
issues are more central to the future of
these currencies.
16
“We are beginning to believe the
At its most recent meeting, the Bank
of Canada said the strong Canadian party will be over soon,” she said in a
dollar will mean weakerthan-expected
growth
FIGURE 1 — DOLLAR VS. DOLLARS
throughout 2005.
Have commodities
peaked?
In a February report, Citigroup Smith Barney said
commodity
currencies
seem to have peaked.
(Citigroup included the
South African rand as a
commodity currency.)
It is now believed that
there is a strong correlation
between metal prices, commodity prices, and commodity currencies, the
report says. The general
case is that as the dollar
falls, metal and commodity
prices rise.
The report says countries
with commodity currencies
tend to benefit from a “virtuous circle:” As metal and
commodity prices increase,
the country’s terms of trade
improve, resulting in a
stronger domestic currency,
along with falling inflation
and interest rates. This
stimulates higher growth in
domestic economic activities, according to Citigroup.
The price of oil is one reason Kathy Lien, chief analyst with Forex Capital
Markets in New York,
believes the commodity
currencies are headed for
more trouble.
The long-term strength in the Aussie (top), New
Zealand (middle), and Canadian dollars (bottom)
vs. the U.S. dollar were the result of strong commodity prices and favorable interest-rate differentials.
0.75
New Zealnd dollar/U.S. dollar
(NZD/USD), weekly
0.70
0.65
0.60
0.55
0.50
0.45
0.40
Australian dollar/U.S. dollar
(AUD/USD), weekly
0.75
0.65
0.55
Canadian dollar/U.S. dollar
(USD/CAD), weekly
1.55
1.45
1.35
1.25
2001
2002
2003
2004
2005
Source: TradeStation
panel at the New York Traders Expo in
February. The rally in oil prices has
taken a toll on foreign demand, she
added in a report.
Interest rate correlations
Narrowing interest-rate differentials
with the U.S. will also play a role in
driving investors out of these currencies, Lien says. Hedge fund money
has been pouring in amid the growing
popularity of “carry trades” in which
investors go long the currency with
high interest rates and short the one
with low interest rates. (See, “Getting
a lift from the carry trade,” Currency
Trader, Oct. 2004.)
In Australia, interest rates have
remained at 5.25 percent since
December 2003, while U.S. short-term
rates moved up from 1 to 2.5 percent.
(New Zealand’s rate is 6.5 percent.)
But Lien says interest-rate differentials will decrease, and as they do,
investors will be less attracted to carry
trades.
However, Australia’s central bank
gave forex markets a shake earlier this
month when they said renewed inflationary pressures could mean a rate
hike within months.
If commodities continue
to rise
On the other side of the coin, Chuck
Butler, president of EverBank World
Markets, believes commodity markets
are in the sixth year of a 20-year bull pattern and doesn’t anticipate a big China
slowdown, two big factors that will support the commodity bloc currencies.
Also, New Zealand and Australian
banks have a reputation for keeping
inflation out of their economies,
Butler says. He says the Canadian dollar, which doesn’t have as dramatic an
interest-rate differential with the U.S.,
will be supported by a weak dollar
outlook. Questions or comments? Click here.
The June issue of Active Trader (on
newsstands now) features an interview
with Jim Rogers that discusses the global
commodities outlook.
ECB continued from page 15
January industrial production increased by 3.1 percent, on a monthover-month basis. This came in well
above most analysts expectations for a
0.7 percent rise.
What’s holding the Euro zone
back?
While economists have forecasted
growth in the neighborhood of 3.5-4.0
percent for the global economy in
2005, the Euro zone is expected to
deliver a much weaker performance
around 1.6 percent.
“There is a disconnect between the
Euro zone and the global economy,”
notes Thorsten Fischer, senior economist at Economy.com.
What’s holding the Euro zone back?
Economists point to so-called “structural” challenges, which limit growth
potential over the near term.
“The problem in Europe is a structural problem,” says Carl Weinberg,
chief economist at High Frequency
Economics. “Europe is adjusting to
monetary union and the accession of
eastern European countries. Workers
in Germany are finding that they are
no longer competing with workers in
Germany or even France for the next
job. Companies have discovered that
they can build factories in the Eastern
European region. Convergence might
mean wage reductions in the higher
wage countries, which makes it harder
to generate an increase in spending.”
Overall, analysts point to excessive
regulation, red tape, an over-regulated
labor market, and rising pension and
health care costs (which are funded
through payroll taxes) as negative pressures on Euro zone growth prospects.
Germany, the largest economy in
the Euro zone, produces nearly one
third of the entire Euro zone’s output,
according to Fischer.
However, Weinberg calls the
German economy “flat at best, but it is
probably contracting.”
4cast’s Webster adds, “Clearly, slow
growth in Germany has been biasing
down the total GDP numbers.”
Two wild cards to watch
Analysts will be keeping close tabs on
the inflation numbers out of the Euro
zone later this year, as they alone will
offer clues to the actual timing of any
potential rate hike. Energy prices and
the rate of the Euro will be two wild
card factors, which could play into the
inflation outlook. Of course, a continuing rise in energy prices could add
pressure to the inflation outlook.
The relative strength of the Euro has
also played into the inflation outlook.
“The strong Euro has definitely contained inflation. It gives the ECB a reason not to raise rates,” says Fischer.
“Import prices have not contributed to
inflation at all, except for some commodity goods.”
As a result of this relationship, a
weakening of the Euro later this year
could actually light a fire under inflation pressures in the Euro zone.
Implications for the Euro
If a tightening is seen by the ECB this
year, analysts are forecasting minimal
increases of either .25 or at the most .50
basis points by year-end. However, others have shifted to a no-tightening bias.
“My view is that the ECB will not raise
rates at all this year,” Weinberg says.
Market players, however, have yet
to “reprice” expectations into the
exchange rate.
“Market pricing is still for a second
half year rate rise, but 4cast continues
to take the view that any tightening
this year is unlikely,” Webster says.
“However, we do now expect rates to
rise by some 50 basis points around
the end of first quarter 2006.”
What will this mean for the Euro?
“The notion that the ECB will not
hike rates this year, while the Federal
Reserve hikes rates aggressively, adds
up to a wide change in interest rate
spreads between Euro land and the
U.S.,” Weinberg says. “That’s negative
for the Euro and positive for the dollar.” Questions or comments? Click here.
17
CURRENCY STRATEGIES
Fibonacci fan lines
Currency traders generally use Fibonacci percentages to determine standard horizontal retracement
levels in trending currencies. Using these percentages to construct Fibonacci “fan” lines adds another
dimension to this type of analysis.
BY CORNELIUS LUCA
M
onitoring the health tous horizontal Fibonacci lines, there Leonardo of Pisa, an Italian matheof the prevailing are two other ways to apply the matician who introduced the Hindutrend is a funda- Fibonacci ratios for retracement analy- Arabic number series that would evenmental responsibili- sis: fan lines and arcs. We will focus on tually bear his name to Western
ty for any trader. And while at times fan lines and compare them to the Europe in his work titled Liber Abaci
you will benefit from such moves as standard horizontal Fibonacci retrace- (Book of Calculations) approximately
the downtrend that occurred in the ment lines.
eight centuries ago.
dollar/Norwegian krone (USD/NOK)
The Fibonacci sequence is a number
in the fourth quarter of 2004 (see Fibonacci review
series for which every new number is
Figure 1), such relentless trends are the The Fibonacci ratios are named after the sum of the previous two numbers:
exception rather than the rule.
Even the strongest trends
FIGURE 1 — STRONG DOWNTREND
are typically subject to several
Although currencies have a reputation for strong trends, the down move in the U.S. dolpullbacks or retracements
lar/Norwegian krone in late 2004 is relatively rare; price trends are more typically inter(shorter-term countertrend
rupted by periodic retracements, or corrections.
moves). Many traders rely on
Fibonacci numbers to deter7.000
U.S. dollar/Norwegian krone (USD/NOK), daily
mine likely retracement price
6.900
points. The most popular of
these so-called Fibonacci lev6.800
els are the ratios .382, .50 and
6.700
.618, or 38.2 percent, 50 percent, and 61.8 percent.
6.600
(Actually, 50 percent is not
even a Fibonacci retracement
6.500
level, but it is bundled with
6.400
this group because of its high
technical significance.) The
6.300
basic application of these per6.200
centages is that a market will
often pause or correct when it
6.100
retraces 38.2 percent, 50 percent, and 61.8 percent of the
Sept.
14
24
Oct.
18
28
Nov.
19
Dec.
13
most recent price trend.
Source: DealBook FX 2
In addition to these ubiqui18
Fibonacci retracements lines have different
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89,
144, 233, 377, etc. One of the primary
properties of the series is that as it progresses, the ratio of any number and its
preceding number comes increasingly
closer to 0.618 — e.g., 55/89 =
61797, 377/233 = .61803, and
FIGURE 2 — FIBONACCI FAN LINES FOR UPTREND
so on.
The Fibonacci ratio is found
Like standard trendlines, Fibonacci fan lines represent support in an uptrending market.
in, among other things, the
However, although the fan lines touch some of the earlier price lows in the uptrend, they
geometry of the logarithmic
are not constructed by connecting these price lows.
spiral found throughout
Euro/U.S. dollar (EUR/USD), daily
nature (in a snail’s shell, etc.).
1.3666
1.360
The ratio of the length of the
arc to its diameter is 1.618,
1.340
which is the inverse of 0.618.
Another natural form that
1.320
exhibits Fibonacci proportions
1.3040 1.300
is the double helix of the DNA
molecule.
1.2846
1.280
Fibonacci ratios are used by
both classic technical analysts
1.2652
1.260
and Elliott Wave practitioners.
For example, Elliott Wave
1.240
adherents often project future
price targets by measuring the
1.220
most recent trend and multi1.200
plying by a Fibonacci ratio.
Sept.
21
Oct.
15
28
Nov.
23
Dec.
17
30
2005
Here’s a summary of some of
the Fibonacci series’ interesting numerical relationships:
(e.g., 55 and 144) approaches uptrend, or add 38.2 percent and 61.8
0.382,
while
the
inverse percent from the low of the range to
• The
sum
of
any
two
calculate upside retracement levels for
approaches 2.618.
consecutive numbers in the series
a downtrend.
equals the next number.
For example, if a currency pair ral• After the first four numbers, Plotting Fibonacci fan lines
the
ratio
between
two Figure 2 shows Fibonacci “fan lines” lied from 1.5000 to 1.7500, the move is
consecutive ascending numbers applied to an uptrend in the Euro/U.S. .2500 and the 38.2- and 61.8-percent
approaches 0.618, which is a dollar (EUR/USD) uptrend. These retracement levels would be 1.7500 common retracement percent lines are drawn by connecting the sig- (.2500*.382) = 1.6545, and 1.7500 nificant high or low that starts the (.2500*.618) = 1.5955, respectively. The
used by traders.
• As the numbers rise, the ratio trend with the key Fibonacci retrace- Fibonacci fan lines would connect the
between
two
consecutive ment levels for that trend move: You low price of 1.5000 to these two
descending numbers approaches measure the range between a signifi- retracement levels. The 50-percent
1.618, which is the inverse of cant low and a significant high, then level is usually included with these
deduct 38.2 percent and 61.8 percent two ratios.
0.618.
The primary advantage of Fibonacci
• The ratio between every other from the high of the range to calculate
continued on p. 20
number in ascending order downside retracement levels for an
characteristics than standard support
and resistance lines.
19
CURRENCY STRATEGIES continued
fan lines vs. standard horizontal Fibonacci retracement levels is the fans will provide earlier signals.
Combining fans and
horizontal retracement
levels
FIGURE 3 — CALCULATING FAN LINES
Here fan lines and standard horizontal Fibonacci retracement levels are applied simultaneously to the uptrend. The horizontal lines are drawn by calculating the range from the
trend’s low to high, and subtracting “Fibonacci percentages” of 38.2 percent, 50 percent
and 61.8 percent of that amount from the high. The fan lines are drawn by connecting
the low price to these three retracement levels.
1.3666
1.360
Let’s take a look at both the
Fibonacci fan lines and hori1.340
zontal retracement lines in
Figure 3. In early January,
1.320
1.3040
notice how the pair tested
1.300
both the 38.2-percent fan line
1.2846
and the 38.2-percent horizon1.280
tal retracement lines. Price ini1.2652
tially bounced off the horizon1.260
tal line and followed the fan
line upward for a few days
1.240
before turning lower again.
1.220
Retracement lines, whether
fans or horizontal, behave dif1.2026
1.200
ferently from standard sup28
Aug.
31
Sept.
Oct.
20
Nov.
23
Dec.
27
2005
port and resistance lines,
which are supposed to hold
price. When they break, the
market is expected to fall (when sup- qualities for a longer time. They es below the first (38.2-percent) fan
port gives way) or rally (when resist- behave more like magnets, either line, expect that line to change into a
attracting or repelling prices. For resistance level. This means the 50-perance breaks) further.
By comparison, Fibonacci lines tend example, in the case of projecting cent fan line will turn into support,
to retain their support or resistance retracements in uptrends, if price clos- and these two lines will provide the
boundaries of the next trading
range.
FIGURE 4 — BREAKING THE FINAL FAN LINE
The 50-percent line is generPrice paused around the 50-percent fan line but forcefully (and simultaneously) broke
ally considered to be the
through the 61.8-percent fan line and the horizontal 50-percent retracement level.
strongest retracement level. If
it also gives way, it will turn
1.3666
into resistance and the next
1.360
fan line (61.8 percent) will
1.340
become the third support
level. This is the last line of
1.320
defense for the uptrend; when
1.3040
broken, it signals the uptrend
1.300
has ended.
1.2846
This kind of analysis aug1.280
1.2652
ments standard horizontal
1.260
Fibonacci levels; look for
points at which the two
1.240
approaches indicate similar
retracement levels.
1.220
1.2026
2004
31
Sept.
Oct.
20
20
Nov.
23
Dec.
27
2005
28
Feb.
1.200
Following the
percentages
Let’s test these concepts on the
evolving EUR/USD price
FIGURE 5 — CONVERGING FAN LINES
action. Figure 4 shows the curIn addition to the existing fan lines, a second set of fan lines is added to gauge potential
rency pair peaked in lateretracements of the new downtrend.
December 2004 and then made
an aggressive six-day decline
1.3666 1.360
in early January. It then hit the
previously discussed double1.340
support level.
1.3289
Note also the magnet-like
1.3182
1.320
quality of the 50-percent mid1.3076
1.3040
dle fan line, which in this case
1.300
overlapped with the 38.2-per1.2846
1.280
cent horizontal Fibonacci line.
1.2652
The closings around and below
1.260
the middle line suggested the
1.2730
next trading range for
1.240
EUR/USD would be between
1.220
the 50-percent and the 61.8-percent fan lines. However, it took
1.2026
1.200
only two days of aggressive
declines to challenge the final
2004 Sept.
Oct.
20
Nov.
23
Dec.
27
2005
28
Feb.
fan line, which also proved to
be the weakest of the lot.
In this case, traders could
In Figure 5, the first set of fan lines retracement levels, and the two methuse these various lines as possible tar- is applied to the major uptrend and the ods used in conjunction can identify
gets for profit-taking on short posi- second to the secondary downtrend stronger support and resistance levels.
tions opened after the currency had (countertrend) on the daily EUR/USD Also, because the marketplace has yet
apparently peaked.
chart. The intersections between the to use this method much, fan line levfan lines going in divergent directions els will generally not be subject to
Using other inputs
can provide confirming support and stop-loss hunting as standard lines.
Don’t ignore additional technical resistance areas.
information when performing this
Fibonacci fan lines can offer earlier For information on the author see p. 8.
type of analysis. For instance, immedi- signals than standard horizontal Questions or comments? Click here.
ately after the sharp down move in
January (when the currency pair
Related reading
bounced off the 38.2 horizontal support level), price made a candlestick
"The Fibonacci Swing Filter" Active Trader, February 2005
pattern called “three methods,” which
This approach creates an adaptive trading system that adjusts to the
consists of three days of countermarket's behavior by measuring price swings in terms of Fibonacci
movement to the existing downtrend.
retracement percentages.
(This also could have been interpreted
as a bear flag.)
"Trading with synchronicity" Active Trader, January 2003
The second consolidation around
A trading approach that combines Fibonacci price analysis with time analysis
the 38.2-percent horizontal line formed
to better identify potential reversal points.
another shorter-term bear flag, and
once it started to unfold, it provided
"Candles in the zone" Active Trader, June 2002
additional confidence in a bearish outThis candlestick pattern strategy uses Fibonacci ratios to identify changes in
look.
trends and counter trends.
Using more than one set
of fan lines
Generally, traders should use only one
set of fan lines if there is only one trend
being analyzed. However, if more than
one trend is present, additional sets of
fan lines can be applied.
"Technical Tool Insight: Fibonacci ratios" Active Trader, April 2002
A primer on Fibonacci ratios and their trading applications.
You can purchase and download past Active Trader articles at
www.activetradermag.com/purchase_articles.htm.
21
CURRENCY STRATEGIES
Using multiple
trend-change signals
This approach combines trade signals or indicators to create a composite technique for defining
a market’s trend and making trades.
BY RUSSELL ARTHUR LOCKHART, PH.D.
R
egardless of the market, trading approaches
should provide unambiguous entry, exit (target), and stop-loss signals. The following discussion illustrates how to use
three indicators or signals to determine the trend on any time frame and
dictate whether to be long or short.
The three methods outlined here are
the three-period trend state, the threeprice break signal, and the relationship
between the most recent close and a
13-period exponential moving average
(EMA) adjusted forward three bars
into the future.
One aspect of the approaches discussed here is that they are “either-or”
methods — that is, they always indicate the trend is either long or short,
rather
than
flat
(no
trend).
Accordingly, each method’s stop-loss
point is a signal in the opposite direction.
Three-period trend state
age, triggering a buy signal. The maximum gain of the short-sale trend signal was 560 pips; since going long, the
trend signal has produced a maximum
gain of 287 pips.
The three-period trend state is a rolling
three-period breakout-breakdown signal: a move one pip above the most
recent three-period high is a buy signal; a move one pip below the three-
FIGURE 1 — TREND SIGNAL INTERACTION
The three trend-change indicators shown here work together to confirm or
negate buy and sell signals.
Upper Bollinger Band
1.3800
3-price break gives short signal
13-period EMA shifted
forward 3 periods
1.3600
“13-shift” gives short signal
“13-shift” gives long signal
1.3400
Forward-adjusted EMA
The forward-adjusted EMA, which
combats the lag inherent in any moving average, decreases whipsaws
(repeated swings above and below the
average), particularly in strongly
trending markets. When price crosses
above the EMA, the trend is long and a
buy is indicated; the opposite is true
when price crosses below the EMA.
Figure 1 is a daily chart of the
Euro/U.S. dollar (EUR/USD) currency pair. The first seven days on the
chart all closed above the forwardadjusted EMA, but the fourth day
closed below it, issuing a sell signal.
Price stayed below the average
(reflecting a downtrend) until Feb. 14,
when it crossed back above the aver22
1.3200
1.3000
1.2800
3-period trend state gives long signal
1.2600
January 2005
February
Source: RealTick by Townsend Analytics, Ltd.
period low is a sell signal.
For example, look at the early
February lows. There is a sizeable
down candle, followed by a doji (a candle that opens and closes at nearly the
same price), followed by an up-closing
candle. The arrow marks where price
exceeded the highest high of the previous three candles, triggering a long signal in the three-period trend state. After
this trend-change signal, the market
produced a maximum gain of 450 pips.
lied to 1.3628, with the break price
being a close below 1.3506 (the latter
being the 14th new high in trend —
three before the current new high in
trend). On the first trading day of the
year, the market closed at 1.3461, thus
going short on the three-price break,
with the new break price being the
prior trend high close at 1.3628. The
market proceeded to make eight new
closing lows with a maximum gain of
539 pips, before reversing long on a
close above 1.3054.
Three-price break
The three-price break signal is based
on closing prices. Each successive
close is classified as either a “new
price” in trend, (e.g., a higher close in
an uptrend), a “break” in trend (a close
below the “break price,” which is the
closing price three “new prices” back
in an uptrend), or a “non-event” (neither a new price nor a break price).
A long trend remains intact until
broken by a close below “three new
prices” back in the trend — that is,
three “new price” closes back in trend
(not three periods back). Because the
method ignores non-event periods and
counts only new prices in trend or
breaks in trend, a trend that has
reached “three new highs” can include
many more than three trading periods.
At the end of 2004 the market had
made 17 new daily high closes and ral-
Signals in sync
On any trading day you will always
know each method’s trend state. One
way to determine trade entry is to
require two of the trend indicators to
agree.
For example, look at the early
February low. As noted earlier, the
three-period trend state went long on
Feb. 10 at 1.2815. However, at this
point both the three-price break and
13-period forward-adjusted EMA were
short, so no position would be taken.
However, when the market closed
above the forward-adjusted EMA on
Feb. 14, the other two trend indicators
were already long, so this close
became the basis for a new (or additional) long-side entry.
This step-wise relation of trend state
should appeal to different types of
traders. Momentum traders will
appreciate the early warning trend
TABLE 1 — THREE-PRICE BREAK
change of the three-period break,
REVERSAL LEVELS
particularly when a reversal is indiThe highlighted row shows where the trend
cated after a move to an upper or
hits three new prices in trend (up or down)
lower Bollinger Band (using a 13on the daily and eight-minute time frames.
period moving average and 2.618
Intervals
Tr
Close
Break
standard deviations for the
Monthly:
L14
1.3556
1.2615
Bollinger Band settings). Highly
Weekly:
L1
1.3073
1.2867
aggressive traders may wish to act
on a single indicator’s trend-change
Daily:
L3
1.3258
1.2860
signal and use the subsequent sig60 minute:
L6
1.3190
1.3149
nals to build positions. The more
30 minute:
L9
1.3190
1.3172
conservative trader can wait for the
13 minute:
L11
1.3190
1.3171
second trend change to confirm
entry.
8 minute:
L3
1.3190
1.3168
5 minute:
L22
1.3190
1.3177
3 minute:
L4
1.3190
1.3174
Source: Ralomatic by TCB Corporation
Targets
For three-period trend state signals
and the forward-adjusted EMA,
natural exit targets are the forwardadjusted EMA and the extreme
Bollinger Band (i.e., the upper band for
a long trade and the lower band for a
short trade).
Targets in the three-price break
method are provided by Fibonacci
numbers — 3, 5, 8, 13, 21, 34, etc. The
Fibonacci ordinal degree of new prices
achieved in trend provides exit points.
For example, if you are long, the first
profit-taking point would be at the
third new high close in trend; the next
profit-taking target would be at the
fifth new high close in trend; the next
would be the eighth new high close in
trend, and so on.
Table 1 shows the three-price break
data for different time periods. One
approach is to focus on Fibonaccibased time periods for intraday trend
following (one-minute, three-minute,
five-minute, eight-minute, 13-minute),
as well as the 30-minute period. The
table highlights when the trend hits
three new prices in trend (up or down)
on the daily time frame and the eightminute time frame. (Note that in the
five-minute time frame, the trend is
already rather extended at 22 periods.)
You can use trend reversals in any
time period as an exit (usually it will
be the shorter time periods that
reverse first), thus preserving gains
from earlier entry. Knowing the trend
state in these Fibonacci-based time
periods is helpful in managing
trades.
For information on the author see p. 8.
Questions or comments? Click here.
Related reading
“Weighted and exponential moving
averages,”
Currency Trader, January 2005.
“Technical Tool Insight:
Fibonacci ratios”
Active Trader, April 2002.
A primer on Fibonacci ratios and
their trading applications.
23
THE BIG PICTURE
Who’s afraid
of the big, bad deficit?
Contrary to conventional wisdom, the current account deficit does not drive
the dollar, according to one strategist.
BY MARC CHANDLER
N
early
everyone
appears to agree: The
large U.S. current
account deficit is
undermining the value of the dollar in
the foreign exchange market. Sure
enough, the dollar has been in a major
bear market. The Euro bottomed
against the dollar below $0.8250 in fall
2000 and reached a record high at the
end of last year above $1.3650 (see
Figure 1). The dollar has been declining against the Japanese yen since
peaking in 2002 near 135 yen, and earlier this year traded below 102 yen,
albeit briefly (see Figure 2).
And yet there is good reason to be
suspicious of what passes for conventional wisdom. For example, the
Hungarian forint was one of the
strongest currencies against the dollar
last year, even though that country’s
current account deficit was around 9
percent of gross domestic product
(GDP). By comparison, the U.S. current account deficit was closer to 6.0
percent of GDP.
Or consider the Australian dollar. It
appreciated nearly 4 percent against
the U.S. dollar, despite its current
account deficit being slightly larger
than the U.S.’s as a percentage of GDP.
Moreover, for active market participants, it is difficult to build a trading
strategy around the U.S. current
account position. The Euro rose about
7.5 percent in 2004, but in the first six
weeks of 2005 it surrendered 4.3 percent. The dollar lost 4.5 percent against
the yen in 2004 and recouped more
24
than half in the first six weeks of this
year. The volatility in the currency
market is such that nothing substitutes
for disciplined risk management.
Not your grandfather’s
economy
Conceptually, many observers seem to
work with informal models that have
foreign demand being met by exports,
and strong demand in the U.S. being
met by imports. This may have been
true once, but it is no longer a valid
description of the way the international economy works.
U.S. companies service foreign markets not so much by exporting, but
rather by producing and selling goods
locally. Specifically, the U.S. will export
around $1 trillion worth of goods this
year. However, foreign affiliates of U.S.
companies will sell approximately $3
trillion worth of goods overseas this
year. Truth be told, sales by foreign
affiliates of U.S. companies have outstripped U.S. exports since at least the
mid-60s, when the U.S. Commerce
Department began recording such data.
According to data from Japan’s
Ministry of Finance, local sales by affiliates of Japanese companies began outstripping their exports in the late 90s.
Consider the auto sector. Previously, a
large chunk of the U.S. trade deficit
with Japan could be traced to automobiles and auto parts. Owing in part to
such protectionist measures as voluntary export restrictions and orderly
market agreements, Japanese companies shifted production facilities. The
increasing share of the U.S. auto market they are securing is coming
through local production using U.S.
workers.
The U.S. Bureau of Economic
Analysis (BEA) recognizes the importance of this transformation. For several years they have been experimenting
with an alternative measure of the U.S.
current account. Rather than simply
considering the movement of goods
and services over national boundaries,
they want to take into account who
owns the goods being sold.
Using this “ownership-based framework,” the U.S. current account deficit
Many traders and analysts seem to work with informal
models that have foreign demand being met by
exports, and strong demand in the U.S. being met by
imports. This may have been true once, but it is no
longer a valid model of the international economy.
FIGURE 1 — EURO/U.S. DOLLAR
appears materially smaller. Specifically,
this past January the BEA provided a
preliminary estimate of the 2003 current account deficit using the ownership-based framework of $377.6 billion, which is nearly $119 billion less
than the conventional measure based
purely on location of production. The
irony of this is the ownership-based
framework’s estimate would place the
U.S. current account deficit close to
what economists claim is a sustainable
proportion of GDP.
It seems likely this alternative measure, or something like it, will replace
the conventional measure in the nottoo-distant future. Recall that previously the U.S. used to report the merchandise trade balance, which was
consistently in deficit. Separately, the
U.S. reported the service trade balance,
which was consistently in surplus.
During the presidency of Ronald
Reagan, the two were combined; it
made both economic and political
sense. Service trade was growing in
importance and combining both gave
a more complete reading of the U.S.
trade position. Politically, the combined result showed a smaller deficit
and may have helped undermine protectionist sentiment. The same general
arguments favor adopting an ownership-based framework for measuring
the U.S. current account balance.
Although the Euro reached a record high above $1.3650 at the end of 2004 and
gained approximately 7.5 percent last year, it dropped 4.3 percent in the first six
weeks of 2005.
Euro/U.S. dollar (EUR/USD), weekly
1.35
1.30
1.25
1.20
1.15
1.10
1.05
1.00
0.95
0.90
0.85
2001
2002
2003
2004
2005
FIGURE 2 — U.S. DOLLAR/JAPANESE YEN
The dollar has been declining against the Japanese yen since peaking near 135
in 2002, and earlier this year traded below 102, albeit briefly. However, the dollar recouped more than half its 2004 losses vs. the yen in early 2005.
U.S. dollar/Japanese yen (USD/JPY), weekly
135
130
125
120
115
Robbing Peter to pay Paul
Another way in which the conventional understanding of the current account
balance does not jibe with the reality of
the modern global economy is the role
of intra-firm trade. Cross-border transactions between multinational enterprises and their affiliates, or between
two affiliates of the same company,
account for a significant part of world
trade. The United Nations estimates
that more than a third of world trade is
accounted for by intra-firm activity.
In 2002, the most recent year the U.S.
Department of Commerce published
disaggregated data, intra-firm trade
comprised nearly a third of U.S. merchandise exports and almost 40 percent
of U.S. merchandise imports. Intra-firm
110
105
2001
2002
2003
2004
2005
trade accounted for significantly less
trade in services — only 26 percent of
U.S. service exports and 20 percent of
service imports were between affiliated
partners. In dollar terms, this means
that almost $196 billion of the $422 billion trade deficit the U.S. recorded in
2002 reflected movement of goods and
services within the same company.
In essence, one dimension of globalization is the extension of a division of
labor that distributes around the world
different functions of a factory floor or
a back-office. Another way to conceptualize this process is that national borders zigzag through a factory or office.
Movement of goods from one side
of the factory to the other counts as a
trade deficit, according to our archaic
national accounting system. But this
intra-firm trade differs from classic
continued on p. 26
25
THE BIG PICTURE continued
trade between two unaffiliated parties
in significant ways.
First, intra-firm trade may be less
sensitive to currency fluctuations than
classic trade. For example, if an auto
manufacturer’s Canadian affiliate
makes a braking system and exports
the component to the parent factory in
Detroit, where it gets assembled into
the car, a marked appreciation of the
Canadian dollar may have little impact
on the company’s geographic division
of labor and therefore trade patterns.
Second, and arguably more important, such intra-firm trade does not
require external financing. Many
observers argue the U.S. trade deficit
needs to be offset, or paid for, by borrowing from foreigners. But because
almost half the 2002 U.S. trade deficit
reflects intra-firm trade, paying for the
braking system in the previous example does not require financing the way
it would if the trade was between unaffiliated parties. It amounts to little more
than the old proverb of robbing Peter to
pay Paul. This means the amount of
foreign borrowing that is required to
finance the U.S. trade deficit is significantly less than most pundits claim.
Paying the piper
Given the accumulation of current
account deficits over the past quarter
century or so, many fear foreign
investors’ appetite for U.S. assets is
satiated. However, according to U.S.
Treasury data, foreign investors purchased $915.8 billion worth of U.S.
assets in 2004, compared with purchases of $745.9 billion in 2003. This is more
than enough to finance the U.S. current
account deficit as conventionally measured. The 2004 current U.S. account
deficit stood at $666 billion.
Contrary to some claims in the mainstream press, the data does not indicate
the U.S. relies more on foreign central
banks than private sector investors to
fund the current account. The Treasury
data clearly points to this. Foreign central banks accounted for about a quarter of the foreign demand for U.S. securities last year — a significant, but not
overwhelming amount. Indeed, for26
The big bugaboo in the foreign exchange market —
the large U.S. current account deficit — is not
so scary.
eign private investors alone bought
$679.6 billion of U.S. paper assets in
2004, which is sufficient to fund the
U.S. current account deficit as conventionally measured.
All foreign investors are not equal.
The most fickle foreign investors might
not be very foreign. When identifying
the geographic location of investors,
the Treasury Department has a line for
Caribbean-based investors, which is
more than likely reflective of hedge
fund activity. (There are tax and regulatory advantages of basing hedge fund
operations in the Caribbean.) These
hedge funds accounted for the lion’s
share of reduction in the so-called foreign demand for U.S. Treasuries in
December, for example. Specifically,
the monthly Treasury data showed the
net foreign purchases of U.S. Treasuries
fell to $1.4 billion in December 2004
from $11.8 billion in November. These
Caribbean-based hedge funds were net
sellers of $8 billion of U.S. Treasuries in
December. Moreover, in Q4, they were
net sellers of a little more than $30 billion of U.S. Treasuries.
The Treasury data suggests that a
potent threat to the smooth financing
of the U.S. current account deficit is
that domestic investors will step up
their purchases of foreign assets —
which is exactly what the likes of
Warren Buffet and Bill Gates have
done in a high-profile way. U.S.
investors’ purchases of foreign assets
rose 50 percent last year to $94 billion.
A full fifth of these were purchased in
December as the dollar tumbled, following Greenspan’s public musings
about the U.S. current account deficit.
To be clear, U.S. purchases of foreign
assets say nothing about the foreign
appetite for U.S. securities. However, it
does complicate the picture a bit, as the
U.S. must import sufficient capital not
only to fund the current account deficit
(properly understood), but also to offset
the U.S. capital outflows.
This is taking place. On a net basis
(foreign purchases of U.S. assets minus
U.S. purchases of foreign assets) the
U.S. imported $821.8 billion of portfolio capital in 2004, up from $683.6 billion in 2003.
Overblown fears?
Digging into economic data suggests
the big bugaboo in the foreign
exchange market — the large U.S. current account deficit — is not so scary.
America’s commercial empire is based
on a foreign direct investment strategy,
which entails servicing foreign demand
primarily through building and selling
locally. When an ownership-based
framework is used instead of the movement of goods over national boundaries, the U.S. current account deficit is
close to levels thought to be sustainable.
In addition, given the establishment
of supply chains across the globe, intrafirm trade is significant and accounts
for almost half of the U.S. trade deficit
as conventionally measured. This
intra-firm trade may be less sensitive to
currency fluctuations and may not
require the kind of financing that is
often associated with a trade deficit.
Lastly, it appears that foreign investors
remain willing and able to finance the
U.S. current account deficit.
Currency traders: Beware of deducing currency movement from the U.S.
current account position. The dollar has
experienced long periods of both
appreciation and depreciation while the
country has recorded large trade
deficits. There is no substitute for prudent financial and risk management. For information on the author see p. 8.
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CURRENCY SYSTEM ANALYSIS
MACD system
FIGURE 1 — SAMPLE TRADES
The system caught a couple of winning trades in the Aussie dollar/U.S. dollar
crossrate in late 2004.
0.0120
0.0100
0.0080
0.0060
0.0040
0.0020
0.0000
-0.0020
-0.0040
MACD
Market(s): All.
Entry signals:
1. If the MACD line is above zero and
it crosses above the signal line, buy
tomorrow at the open.
2. If today’s MACD line is above yesterday’s signal line and if today’s MACD
crosses above the zero line, buy tomorrow at the open.
Exit signals:
1. Exit long positions if the MACD line
28
Account balance ($)
System concept: The moving
average convergence-divergence
Signal line (9 day EMA)
0.7950
Sell
indicator (MACD) was developed
0.7900
0.7850
Australian dollar/U.S. dollar (AUD/USD), daily
by Gerald Appel. The primary
0.7800
MACD line is the difference
0.7750
Short
0.7700
between 12- and 26-day exponen0.7650
0.7600
tial moving averages (EMAs), and
0.7550
0.7500
a second “signal” line is a nine-day
12 day EMA
0.7450
EMA of the MACD line. See
0.7400
Sell
0.7350
“Indicator Insight: Moving average
0.7300
Buy
0.7250
convergence-divergence (MACD),”
26-day EMA
0.7200
Active Trader, July 2001 for more
0.7150
0.7100
information about this indicator.
0.7050
0.7000
Buy
The MACD can generate three
0.6950
signals: 1) crossings of the indica0.6900
0.6850
Cover
tor’s zero line (which correspond
0.6800
September
2004
October
2004
November
2004
December
2004
to crossovers of the 12- and 26-day
Source for all figures: Wealth-Lab Inc. (www.wealth-lab.com)
EMAs) are basic trend signals; 2)
crossovers of the MACD line and
the signal line are similar signals, but
FIGURE 2 — EQUITY CURVE (DAILY)
occur earlier; 3) divergences between
A choppy equity curve revealed an annualized profit of less than
price and the MACD — i.e., when price
six percent.
makes a higher high (or lower low) but
2,100,000
the MACD fails to confirm the move by
2,000,000
making a lower high (or higher low).
1,900,000
The system uses the first and second
1,800,000
signal types to have an approach with
1,700,000
1,600,000
mutual confirmation. (We tried some
1,500,000
simple entry rules, such as trading only
1,400,000
crossovers of the zero line, but the results
1,300,000
were worse.)
1,200,000
1,100,000
1,000,000
900,000
800,000
700,000
600,000
500,000
400,000
300,000
200,000
100,000
0
3/21/95 12/11/95 9/24/96 7/10/97 4/27/98 2/10/99 11/25/99 9/7/00 6/25/01 4/10/02 12/30/02 11/7/03 8/24/04
Equity
Cash
Linear Reg
Long
Short
FIGURE 3 — DRAWDOWN
Short trades:: Invert the long-side
signals for short trades. Figure 1 shows
some representative trades.
0
The biggest drawdown occurred in 2004 when the U.S. dollar was in
an extended bear market.
-5
Account balance (%)
crosses below the signal line.
2. Exit long positions if the MACD
line crosses below the zero line.
Risk control and money management: Commit 2 percent of total
capital per trade. Additional stops
beside the system exit rules are not used.
-10
-15
-20
-25
-30
-35
3/21/95 12/7/95 9/18/96
Test data: In this test we run the coded system over a
period of 10 years of a portfolio of daily FX Data in the following currency pairs: Australian dollar/U.S. dollar
(AUD/USD), Euro/U.S. dollar (EUR/USD), British pound
/U.S. dollar (GBP/USD), U.S. dollar/Swiss franc
(USD/CHF), U.S. dollar/Japanese yen (USD/JPY), and U.S.
dollar/Brazilian real (USD/BRL). Note: Currency pairs for
which the U.S. dollar is the base currency (e.g. USD/JPY)
1/28/99 11/10/99 8/22/00
6/5/01
3/19/02 12/30/02 10/13/03 7/26/04
were inverted (e.g. JPY/USD) to enable portfolio testing in
terms of dollars. Data source Comstock/FXtrek
(www.fxtrek.com).
Test period: December 1994 to December 2004 (except the
Brazilian Real, which spanned December 1999 to December
2004).
continued on p. 30
Trade statistics
No. trades:
4/16/98
PERIODIC RETURNS
STRATEGY SUMMARY (DAILY)
Profitabilty
7/2/97
%
Avg. Sharpe Best
return ratio return
748
%
%
Max.
Max.
Worst profitable consec.
consec.
return periods profitable unprofitable
Net profit ($):
746,520.19
Net profit (%):
74.65
Win/loss (%):
38.50
Exposure (%):
6.26
Avg. gain/loss:
-0.15
Weekly
0.15
0.38
12.17
-8.39
46.67
8
11
Profit factor:
1.12
Avg. hold time (days):
10.92
Monthly
0.65
0.37
19.00
-13.48
46.61
6
7
2.07
Quarterly
1.84
0.38
30.27
-12.88
57.50
7
3
Yearly
6.63
0.45
32.02
-11.13
50.00
3
2
Payoff ratio:
1.96
Avg. winner:
Recovery factor:
0.96
Avg. hold time (winners):
18.10
Avg. loser:
-1.05
Avg. hold time (losers):
6.43
Avg. consec. win/loss:
9/13
Drawdown
Max. DD (%):
Longest flat days:
-36.37
412
LEGEND: Net profit — Profit at end of test period, less commission • Exposure —
The area of the equity curve exposed to long or short positions, as opposed to cash •
Profit factor — Gross profit divided by gross loss • Payoff ratio — Average profit of winning trades divided by average loss of losing trades • Recovery factor —
Net profit divided by max. drawdown • Max. DD (%) — Largest percentage
decline in equity • Longest flat days — Longest period, in days, the system is
between two equity highs • No. trades — Number of trades generated by the system • Win/loss (%) — the percentage of trades that were profitable • Avg. trade
— The average profit/loss for all trades • Avg. winner — The average profit for
winning trades • Avg. loser — The average loss for losing trades • Avg. hold
time — The average holding period for all trades •Avg. hold time (winners) —
The average holding time for winning trades • Avg. hold time (losers) — The
average holding time for losing trades • Avg. consec. win/loss — The maximum
number of consecutive winning and losing trades
LEGEND: Avg. return — The average percentage for the period • Sharpe ratio —
Average return divided by standard deviation of returns (annualized) • Best return
— Best return for the period • Worst return — Worst return for the period •
Percentage profitable periods — The percentage of periods that were profitable •
Max. consec. profitable — The largest number of consecutive profitable periods •
Max. consec. unprofitable — The largest number of consecutive unprofitable periods
Currency System Analysis strategies are tested on a portfolio basis
(unless otherwise noted) using Wealth-Lab Inc.’s testing platform.
If you have a system you’d like to see tested, please send the
trading and money-management rules to [email protected].
Disclaimer: Currency System Analysis is intended for educational purposes only
to provide a perspective on different market concepts. It is not meant to recommend or promote any trading system or approach. Traders are advised to do their
own research and testing to determine the validity of a trading idea. Past performance does not guarantee future results; historical testing may not reflect a system’s behavior in real-time trading.
29
CURRENCY SYSTEM ANALYSIS continued
FIGURE 4 — MAXIMUM FAVORABLE EXCURSION (MFE)
Since most trades that at one point enjoyed a two-percent profit
ended up as losses, a trading stop or other exit might be beneficial to this system.
471
500
All trades
420
450
Losing trades
Starting equity: 1,000,000 USD. Interest
rate (rollover) fees were not calculated.
# of trades
400
350
300
165
250
200
Commissions and slippage: Round-turn
commission of 4 pips per every 100,000 units
traded in the base currency and 1 pip for slippage.
150
9
100
––Michael Schneider of Wealth-Lab
30
0
0
0
0
0
6%
8%
10%
12%
14%
10
4
2
0
0
0
1
1
1
0
0
18%
20%
22%
0
2%
4%
16%
FIGURE 5 — MAXIMUM ADVERSE EXCURSION (MAE)
# of trades
On the other hand, too tight a stop could affect profit.
240
220
200
180
160
140
120
100
80
60
40
20
0
214
197
All trades
Winning trades
151
159
85
79
51
2
0
0
0
1
0
0
28
10
6
2
2
29
7
12
1
0
-5.50% -5.00% -4.50% -4.00% -3.50% -3.00% -2.50% -2.00% -1.50% -1.00% -0.50% 0.00%
FIGURE 6 — PROFIT DISTRIBUTION
Although the system produced more losing trades than winners, a
small number of large winners allowed the system to be profitable.
# of trades
Bottom line:
The results here show there’s plenty of room
for further experimentation. As the system
stands now, it’s not worth trading, since a 37percent drawdown and a 5.9-percent annual
return over a 10-year period is not really competitive with other options, including fixed
income.
32
9
50
0%
Test results:
The system returned a total of 74.65 percent
(Figure 2), or an annualized profit of 5.88 percent over the 10-year test period. The maximum drawdown was 36.37 percent (Figure
3). Only 38 percent of all trades have been
winners, which implies that, like most trendfollowing approaches, this system must capture a relatively small number of big moves to
be able to offset the high number of losing
trades. This is confirmed by the profit distribution chart.
The maximum favorable excursion (MFE)
statistics in Figure 4 show there were many
trades that generated profits as large as 2 percent but ended up as losers (420 of 471 losing
trades). This suggests the system is exiting
trades too slowly and a rule (perhaps a trailing stop or other exit technique) that prevents
winning trades from slipping into negative
territory would help. However, the maximum
adverse excursion (MAE) analysis in Figure 5
shows that an additional stop rule could also
cut into the system’s profits if it is too tight.
53
30
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
30
20
10
0
251
155
109
71
45
41
28
1
9
14
7
10
2
3
0
1
0
0
1
1
-4% -3% -2% -1% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15%
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SPOT CHECK
Will the dollar-yen rise again?
For now, the currency pair’s support level has held.
FIGURE 1 — DOLLAR-YEN, MONTHLY
The USD/JPY rate recently tested a long-term chart support level
before inching higher.
U.S. dollar/Japanese yen (USD/JPY), monthly
145
140
135
130
125
120
115
110
105
1997
1998
1999
2000
2001
2002
2003
2004
2005
FIGURE 2 — DOLLAR-YEN, WEEKLY
The currency pair still has a long way to go, but it recently made a
22-week high — a pattern that has exhibited mild bullish tendencies
over the past 20 years.
U.S. dollar/Japanese yen (USD/JPY), weekly
120
118
116
114
112
110
100
108
106
104
102
July
October 2004
32
April
July
October 2005
April
I
t might not look like much on the monthly
chart (see Figure 1), but the U.S. dollarJapanese yen rate (USD/JPY) just concluded a
three-month run during which it rallied nearly six percent after touching a conspicuous support
level chart watchers had in their sights for years.
With talk of the dollar-yen breaking through the
psychologically loaded round number of 100 for
the first time in nearly 20 years (see “Will this be
the year 100.00-yen gives way?” Currency Trader,
March 2005), all eyes were on the currency pair
around year end. But after hitting a low of 101.67
on Jan. 17, USD/JPY rallied as high as 107.61 — its
highest level in 22 weeks (see Figure 2).
The rally looks more robust on the daily chart
(see Figure 3), which shows price recently hurdling
the Feb. 10 high as well as the Nov. 10 high (dashed
line). The question is whether this is just a temporary bounce as technicians came in to buy around
support, or the beginning of something bigger.
Let’s consider some numbers. Over the past 20
years, a rise of 5 percent or more (from low to high)
in the USD/JPY over a three-month period has
occurred 93 times. However, many of these
instances are part of longer runs of overlapping
three-month periods that rose 5 percent or more.
(For example, if USD/JPY rose 5 percent from
January to March and again from February to
April, that would constitute two instances.)
Table 1 summarizes the different runs of consecutive three-month periods that rose 5 percent or
more from March 29, 1985 to March 29, 2005. There
were only three other times a single three-month
period rallied more than 5 percent. The longest run
was 10 months, and the most frequently repeating
— i.e., the mode — run length was two months,
which occurred seven times. (The average and
median runs were 3.46 and 3 months, respectively.)
What this data suggests is that when the
USD/JPY rises more than 5 percent in a threemonth period, more than 89 percent of the time it
will rally at least that much over the next (overlapping) three-month period. This, in turn, implies the
currency pair would rally to at least 108.51 in April,
which is 5 percent above the February low of 103.35.
What about that 22-week high? We searched for
FIGURE 3 — DOLLAR-YEN, DAILY
TABLE 1 — THREE-MONTH RALLIES OF
5 PERCENT OR MORE
Since mid-March, the USD/JPY has been on quite a run, rallying
from 104.83 on March 14 to 107.61 as of March 29.
U.S. dollar/Japanese yen (USD/JPY), daily
107.5
107.0
106.5
106.0
There were only three other times USD/JPY rallied more than 5 percent over three months and
failed to move higher the next month. Roughly
two-thirds of the runs were between three and six
months long.
Length
of run
No. of
occurrences
% of total
occurrences
10
1
3.85
105.5
7
1
3.85
105.0
6
3
11.54
4
5
19.23
3
6
23.08
104.0
2
7
26.92
103.5
1
3
11.54
104.5
February
March
past instances when USD/JPY made a 22-week high and
the most recent two weeks both had higher highs and higher lows than their immediately preceding weeks — the condition the market was in at the end of March.
Table 1 shows an upside bias to the following five weeks.
The odds of a higher close at the end of the five subsequent
weeks is above 50 percent and the average and median
returns are positive. By week 6, though, the odds are only
47.62 percent for an up move, and although the average
gain is still slightly positive, the median gain is -.36 percent.
Also, the largest up moves (LUM) are larger than the largest
down moves (LDM) at all the intervals.
These are not blockbuster numbers, by any means.
3.46
Average run length
3
Median run length
2
Mode run length
However, together with the fact that virtually every off-theshelf technical indicator was recently signaling the market
was overbought and/or turning from downtrend to
uptrend, there are bound to be traders looking to enter into
an incipient uptrend.
If a longer-term trend materializes, its viability will
depend on the larger factors that impact the dollar and other
major currencies. (Our cover story this month discusses one
of the factors, the deficit.) To analyze a recent trade example
in the USD/JPY, see this month’s Forex Trade Diary.
TABLE 2 — PERFORMANCE FOLLOWING MOVE ABOVE 22-WEEK HIGH
Based on 85 examples since 1985, USD/JPY had a slightly better chance to move a bit higher than lower after making a
22-week high and posting back-to-back weeks with higher highs and higher lows.
Avg
Med
Max
Min
%>0
Week 1
0.12%
0.11%
3.78%
-4.92%
52.38%
LUM
1.12%
0.81%
4.35%
0.00%
LDM
-1.03%
-0.51%
0.00%
-7.28%
Week 2
0.05%
0.14%
4.60%
-5.23%
51.19%
LUM
1.69%
1.17%
5.55%
0.00%
LDM
-1.52%
-1.00%
0.00%
-7.28%
Week 3
0.05%
0.25%
6.25%
-8.79%
53.57%
LUM
2.13%
1.48%
6.67%
0.00%
LDM
-1.92%
-1.21%
0.00%
-9.22%
Avg
Med
Max
Min
%>0
Week 4
0.16%
0.30%
7.50%
-10.58%
53.57%
LUM
2.48%
1.85%
8.15%
0.00%
LDM
-2.19%
-1.53%
0.00%
-11.81%
Week 5
0.20%
0.15%
10.40%
-9.41%
50.00%
LUM
2.77%
2.19%
10.40%
0.00%
LDM
-2.37%
-1.85%
0.00%
-11.81%
Week 6
0.04%
-0.36%
8.35%
-7.35%
47.62%
LUM
2.96%
2.35%
11.38%
0.00%
LDM
-2.61%
-1.94%
0.00%
-11.81%
33
INTERNATIONAL MARKET SUMMARY
FOREX (vs. U.S. DOLLAR)
Rank*
Country
Currency
Current
price vs.
U.S. dollar
1-month 3-month 6-month
gain/loss gain/loss gain/loss
52-week
high
52-week
low
Previous
rank
1
Canadian
dollar
0.8215
1.72%
1.00%
4.52%
0.8532
0.7138
15
2
Russian
ruble
0.03611
0.17%
0.44%
5.21%
0.03643
0.03414
9
3
Hong Kong
dollar
0.1282
0.00%
-0.23%
0.00%
0.1288
0.1281
12
4
Indian
rupee
0.02291
-0.13%
-0.09%
4.80%
0.02306
0.02145
13
5
Singapore
dollar
0.6086
-0.69%
-0.20%
2.83%
0.6186
0.5775
10
6
Taiwanese
dollar
0.0318
-0.88%
2.33%
4.31%
0.03253
0.02801
14
7
Thai
baht
0.02584
-0.97%
0.58%
6.31%
0.02621
0.0239
11
8
Japanese
yen
0.009404
-0.98%
-2.58%
3.81%
0.00983
0.0087
16
9
New Zealand
dollar
0.7144
-1.15%
-0.49%
6.40%
0.7464
0.591
6
10
Australian
dollar
0.7717
-1.96%
0.25%
7.33%
0.7988
0.6773
3
11
Euro
1.2959
-2.21%
-4.47%
5.22%
1.3667
1.1758
7
12
British
pound
1.8708
-2.59%
-2.83%
3.49%
1.955
1.7479
5
13
Swedish
krona
0.1422
-2.81%
-5.70%
4.43%
0.152
0.1283
8
14
Swiss
franc
0.8335
-3.26%
-4.98%
4.81%
0.8879
0.7559
4
15
Brazilian
real
0.3654
-3.83%
-1.37%
4.60%
0.3899
0.3103
1
South African
0.1616
-6.62%
rand
As of March 28, 2005 *based on one-month gain/loss
-9.90%
3.40%
0.1783
0.1388
2
16
INTEREST RATES
Rank
1
2
3
4
5
34
Country
Japan
Germany
UK
Australia
U.S.
Rate
Government Bond
BUND
Short sterling
3-year bonds
10-year T-note
March 28
138.90
117.75
94.95
94.24
108.144
1-month
0.59%
0.04%
0.04%
-0.25%
-2.76%
3-month
0.64%
-0.30%
-0.32%
-0.14%
-2.79%
6-month
1.14%
2.70%
0.02%
N/A
-4.62%
Previous
3
5
2
1
4
NON-U.S. DOLLAR FOREX CROSS RATES
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Currency
pair
Symbol
March 27
1-month
gain/loss
3-month
gain/loss
6-month
gain/loss
52-week
high
52-week
low
Previous
Canada $ / Pound
Canada $ / Euro
Canada $ / Yen
Aussie $ / Franc
Aussie $ / Pound
Aussie $ / Euro
Franc / Pound
Pound / Euro
Aussie $ / Yen
Franc / Euro
Real / Pound
Euro / Yen
Real / Euro
Pound / Yen
Real / Aussie $
Franc / Yen
Real / Yen
Aussie $ / Canada $
Franc / Canada $
Real / Canada $
CAD/GBP
CAD/EUR
CAD/JPY
AUD/CHF
AUD/GBP
AUD/EUR
CHF/GBP
GBP/EUR
AUD/JPY
CHF/EUR
BRL/GBP
EUR/JPY
BRL/EUR
GBP/JPY
BRL/AUD
CHF/JPY
BRL/JPY
AUD/CAD
CHF/CAD
BRL/CAD
0.4392
0.6341
87.3819
0.9261
0.4126
0.5956
0.4457
1.443
82.108
0.6439
0.1954
137.8
0.2821
198.89
0.4737
88.6638
38.8708
0.94
1.0153
0.4451
4.19%
3.85%
2.67%
1.25%
0.63%
0.24%
-0.61%
-0.61%
-0.92%
-0.95%
-1.18%
-1.24%
-1.56%
-1.78%
-1.82%
-2.25%
-2.81%
-3.70%
-5.03%
-5.59%
3.71%
5.22%
3.49%
4.96%
2.98%
4.50%
-2.06%
1.68%
2.82%
-0.36%
1.43%
-1.85%
2.98%
-0.08%
-1.63%
-2.33%
1.20%
-0.74%
-6.02%
-2.36%
1.07%
-0.74%
0.73%
2.66%
4.00%
2.23%
1.39%
-1.91%
3.73%
-0.36%
1.18%
1.49%
-0.64%
-0.35%
-2.96%
1.05%
0.84%
2.97%
0.32%
0.11%
0.454
0.6497
89.7805
0.9849
0.4221
0.6358
0.4647
1.5279
83.655
0.665
0.2069
141.59
0.301
205.94
0.5018
91.6645
41.1739
1.0259
1.1054
0.4825
0.397
0.5962
78.0564
0.8547
0.372
0.5643
0.4195
1.4057
74.28
0.6374
0.1714
125.81
0.2575
189.5
0.4389
80.5368
34.3301
0.8863
0.9952
0.4212
20
19
13
17
14
12
18
16
3
15
10
7
9
5
11
4
1
6
8
2
GLOBAL STOCK INDICES
Rank
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
Country
Index
Egypt
CMA
France
CAC 40
Japan
Nikkei 225
Singapore
Straits Times
Italy
MIBTel
Australia
All ordinaries
Switzerland
Swiss Market
Germany
Xetra Dax
UK
FTSE 100
India
BSE 30
Canada S&P/TSX composite
U.S.
S&P 500
Hong Kong
Hang Seng
Brazil
Bovespa
Mexico
IPC
Current
1-month
gain/loss
3-month
gain/loss
6-month
gain/loss
52-week
high
52-week
low
Previous
1602.33
4078.31
11761.1
2151.45
24503
4131.6
5935.5
4343.6
4922.5
6442.87
9533.1
1171.42
13584.56
26702
12852.81
4.97%
1.07%
0.87%
0.76%
0.72%
0.37%
-0.01%
-0.12%
-1.71%
-1.97%
-2.18%
-3.41%
-4.21%
-6.49%
-7.92%
24.54%
6.39%
3.39%
4.67%
4.25%
1.99%
4.21%
2.49%
2.53%
-1.09%
2.58%
-2.86%
-4.49%
2.86%
0.26%
33.87%
10.33%
7.67%
7.81%
14.27%
12.07%
8.25%
10.80%
7.75%
14.45%
10.86%
5.80%
4.14%
14.49%
16.85%
1717.34
4108
12195.66
2182.94
24921
4255.8
6022.9
4435.31
5077.6
6954.86
9968.41
1229.1
14339.06
29584
13931.32
829.84
3452.41
10489.84
1767.23
19733
3346.8
5264.5
3618.58
4283
4227.5
8098.06
1060.72
10917.65
17601
9423.99
1
8
13
7
15
14
12
11
9
3
5
10
6
2
4
2003
2005+
ACCOUNT BALANCE
Rank Country
2004
Ratio*
2003
2005+
Rank
Country
2004
Ratio*
1
Hong Kong
16.404
10
16.697
16.598
9
UK
-43.338
-2
-33.39
-43.098
2
Taiwan
21.3
6.9
29.202
19.378
10
Spain
-33.066
-3.4
-23.549
-36.462
3
Germany
118.525
4.4
52.933
129.726
11
U.S.
-631.268 -5.4
4
Japan
159.402
3.4
136.238
148.931
12
New Zealand -4.102
-4.4
-3.267
-4.151
5
Denmark
4.289
1.8
6.327
4.543
13
Australia
-5.3
-30.212
-30.248
6
Canada
28.195
2.9
17
25.243
7
France
-12.761
-0.6
5.474
-13.246
8
Italy
-18.074
-1.1
-21.942
-13.315
-32.036
-530.669 -641.678
Totals in billions of U.S. dollars
+
*Ratio: Account balance in percent of GDP; Estimate
Source: International Monetary Fund, World Economic Outlook
Database, October 2004
35
FOREX/INTERNATIONAL
GLOBAL
NEWS BRIEFS MARKET SUMMARY
AMERICAS
Argentina’s economy grew by a non-seasonally adjusted 7.9 percent compared to Q4 2003. The country’s
unemployment rate continued to decline steadily, as its
12.1-percent rate fell by a 1.1-percent difference compared
to the previous quarter and 2.4 percent compared to Q4
2003.
Brazil’s GDP increased 4.9 percent compared to the
same quarter in 2003 and 0.4 percent compared to the previous quarter. The January unemployment rate, at 10.2 percent, was a 0.6-percent improvement over the previous
month, but a 1.5-percent decline from the same month in
2004.
Canada’s economy grew 0.4 percent compared to Q3
and grew 3 percent compared to Q4 2003, based on 1997chained dollars.
After strong gains in the first two quarters, Canada’s
profit growth slowed to 1.5 percent in Q3 and Q4. “A strong
Canadian dollar — appreciating 7.7 percent on top of a 12.1
percent gain against the U.S. dollar in 2003 — hurt manufacturers,” said Statistics Canada in a press release. “Their
output was flat in Q4, but overall goods production still
grew 0.5 percent. Real gross domestic product advanced 2.8
percent in 2004, accelerating from the 2.0 percent growth in
the previous year. Exports rebounded despite remarkable
strength in the Canadian dollar.”
The jobless rate in Canada remained at 7 percent for the
third straight month, a 0.3-percent decline from February
2004.
EUROPE
A preliminary release showed a 0.7-percent
increase in the United Kingdom’s economy from the previous quarter and a 2.8 percent increase compared to Q4 2003.
Economic growth for 2004 overall was 3.1 percent greater
than 2003. The country’s unemployment rate remained
unchanged at 4.7 percent compared to the previous period
and dropped 0.1 percent from the same period (NovemberJanuary) a year ago.
Germany’s jobless rate increased to 12.6 percent, 0.5 percent above the previous month and a 1.5-percent increase
from February 2004.
France’s National Institute of Statistics and Economic
Studies (INSEE) reported that 2004 was an upturn year for
the French economy, yet the process was interrupted midyear. “The second half of the year, when the tendency was
more uneven and the oil price was rising strongly, marked a
shift to a period of less robust growth,” said the INSEE in its
March report. “For the year as a whole, growth was underpinned by domestic demand, while the contribution from
36
foreign trade remained negative. French exports benefited
very little from a highly dynamic world environment and
were restricted by the slackness of demand in neighboring
European countries. The result for the first half of 2005 is
therefore expected to be self-sustained growth of around 2
percent.”
The unemployment rate for France was 10 percent, 0.1
percent above the previous month. The INSEE said the rate
should stabilize to an estimated 9.9 percent in June after
peaking in the early part of the year.
ASIA & THE SOUTH PACIFIC
Australia’s GDP grew 1.4 percent on the previous quarter and 5.5 percent on the same quarter in 2004. The unemployment rate of 5.1 percent was the same compared to
January 2005 and a 0.7-percent decline from February 2004.
Preliminary figures estimated a 7.1 percent rise in Hong
Kong’s economy compared to the previous quarter and a
4.8-percent increase (non-seasonally adjusted) compared to
the same quarter in 2003. The jobless rate in the country,
measured from December 2004 to February 2005, fell 0.3
percent from the same period a year ago, its largest drop in
15 months. The rate of 6.1 percent signified a 39-month low.
“The improvement was mainly due to the combined influence of continued expansion in overall employment and a
slight reduction in the total labor supply,” said a government spokesperson. “The near-term outlook for the unemployment rate will depend on the pace of overall economic
growth and job creation for the labor force.”
Japan’s January unemployment rate was 4.5 percent, a
0.1-percent increase from the previous month and a drop of
0.5 percent from the same month in 2004.
All GDP is real, at current prices, and seasonally adjusted unless otherwise stated.
Unemployment rates refer to Q4 2004 or February 2005 numbers, unless
otherwise stated.
Brazil cuts IMF ties
Brazil chose not to renew its loan program with the
International Monetary Fund (IMF) when it expired at
the end of March, a decision fully endorsed by IMF
managing director Rodrigo Rato.
“The decision by the authorities reflects the impressive results, generally ahead of expectations, of Brazil's
macroeconomic stabilization and reform policies that
have been supported by the current arrangement,” Rato
said in a statement.
U.S. Treasury Secretary John Snow also endorsed the
move and hailed Brazil for the accomplishment.
CURRENCY FUTURES
Merc forex and total volume continues to climb
T
he Chicago Mercantile Exchange (CME) reported February average
daily volume of foreign
exchange products was
266,000 contracts, representing notional value of $35 billion per day and an increase of
49 percent compared to February
2004. During the month, electronic foreign exchange products increased
83 percent from the same period
one year ago to reach 210,000
contracts per day.
The Merc reported that volume for February approached
3.8 million contracts per day, up
50 percent from the same period a
year ago and marking an all-time
record month. Average daily volume
on the exchange’s CME Globex electronic trading platform was 2.5 million
contracts, a 106 percent increase from
February 2004. Electronic trading represented 66 percent of total CME volume in February, compared with 48
percent in the prior-year period.
NYBOT’s big month features dollar index volume surge
T
he New York Board of Trade
(NYBOT),
which
trades
futures on the U.S. Dollar
Index (DX) and various currency cross
rates, including the Euro/Japanese yen,
Australian
dollar/Japanese
yen,
Euro/Swiss franc, Swiss franc/Japanese
yen, British pound/ Japanese
yen, and the Euro/ British
pound, also had a successful
February.
Total volume for the month
— 3,413,473 combining futures
and options contracts — was the
second
highest
in
the
exchange’s 135-year history,
despite February being the
shortest month of the year.
U.S. Dollar Index futures volume increased 12 percent during the month.
CURRENCY FUTURES SNAPSHOT The information does NOT constitute trade signals. It is intended only to provide a brief synopsis of each market’s
as of 3/30/05
liquidity, direction, and levels of momentum and volatility. See the legend for explanations of the different fields.
Contract
Pit
Sym
Exch
Vol
OI
10-day
%
20-day
%
sym
move
rank
move
rank
Eurocurrency
EC
6E
CME
105.3
122.7
-2.89%
33
-1.74%
34
Japanese yen
JY
6J
CME
35.5
112.1
-2.94%
86
-2.49%
83
Canadian dollar
CD
6C
CME
26.4
75.9
-0.89%
63
2.06%
61
British pound
BP
6B
CME
22.2
70.1
1.61%
44
-2.40%
55
Swiss franc
SF
6S
CME
21.8
44.9
-2.92%
33
-2.34%
30
Australian dollar
AD
6A
CME
16.9
88.8
-2.42%
86
-2.39%
79
Mexican peso
MP
6M
CME
13.2
78.9
0.31%
0
-2.23%
74
U.S. dollar index
DX
NYBOT
3.6
17.5
2.58%
33
1.80%
54
Euro / Japanese yen
EJ
NYBOT
1.4
15.2
0.04%
0
0.76%
17
Euro / Swiss franc
RZ
NYBOT
0.5
11.1
-0.02%
0
0.57%
48
Note: Average volume and open interest data includes both pit and side-by-side electronic contracts (where applicable).
Price activity is based on pit-traded contracts.
LEGEND:
Sym: Ticker symbol.
Vol: 30-day average daily volume, in thousands.
OI: Open interest, in thousands.
10-day move: The percentage price move from the
close 10 days ago to today’s close.
The “% Rank” fields for each time window (10-day
moves, 20-day moves, etc.) show the percentile rank of
the most recent move to a certain number of the previous moves of the same size and in the same direction.
For example, the “% Rank” for 10-day move shows how
the most recent 10-day move compares to the past
twenty 10-day moves; for the 20-day move, the “%
Rank” field shows how the most recent 20-day move
compares to the past sixty 20-day moves; for the 60day move, the “% Rank” field shows how the most
recent 60-day move compares to the past one-hundredtwenty 60-day moves. A reading of 100% means the
60-day
move
-4.42%
-4.51%
-1.18%
-1.78%
-4.67%
-1.58%
-0.62%
4.01%
0.14%
0.23%
%
Volatility
rank ratio/% rank
88
.91 / 100
100
.96 / 100
19
.35 / 82
52
.79 / 98
90
.84 / 98
100
.81 / 100
59
.32 / 35
90
.99 / 98
1
.41 / 51
3
.21 / 20
current reading is larger than all the past readings, while
a reading of 0% means the current reading is lower
than the previous readings. These figures provide perspective for determining how relatively large or small the
most recent price move is compared to past price
moves.
Volatility ratio/rank: The ratio is the short-term volatility
(10-day standard deviation of prices) divided by the
long-term volatility (100-day standard deviation of
prices). The rank is the percentile rank of the volatility
ratio over the past 60 days.
This information is for educational purposes only. Currency Trader provides this data in good faith, but cannot guarantee its accuracy or timeliness. Currency Trader assumes
no responsibility for the use of this information. Currency Trader does not recommend buying or selling any market, nor does it solicit orders to buy or sell any market. There is
a high level of risk in trading, especially for traders who use leverage. The reader assumes all responsibility for his or her actions in the market.
37
FOREX RESOURCES
GAIN Capital announced the
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focuses on understanding currency quotations and the factors that drive individual currency movements; reading
and analyzing currency charts using
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all students receive a demo account
funded with $25,000 of virtual money to
practice lessons learned on a live trading
platform. For more information, visit
www.learn-to-trade-forex.com.
Forex Trading for Maximum Profit
By Ragee Horner
204 pages, plus multimedia DVD
$79.95
2005, John Wiley & Sons
REVIEWED BY KIARA ASHANTI
R
agee Horner’s book, Forex
Trading for Maximum Profit,
is a good choice for any
novice interested in the forex market.
Horner’s book is divided into
three general sections, the first of
which explains forex market basics.
For newcomers, these first 30 pages
are the best part of the book. Horner
dispels the notion that forex is
exceptionally complicated and risky
and lays the groundwork for exploring the market further.
The second section of the book
delves into a subject matter you’d
find in most trading books — technical tools. Fortunately, Horner
shies away from writing a laundry
list of different technical indicators
and instead focuses on the ones she
uses herself. If discussions of
Fibonacci analysis or the CCI make
your eyes cross, Horner’s clear
explanations should leave you with
the understanding they are not as
complicated as you once thought.
The book’s third and largest section addresses Horner’s mindset
and approach to trading. Horner
covers everything from building a
trade to stop-losses and how a trade
can go astray; she even discusses
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trade and execution management system. The integration allows Portware
users to directly place FX orders into
the Hotspot FXi marketplace via the
user interface and incorporate FX
trades into automated trading strategies executed across the global equities, futures, and options markets.
Portware and Hotspot FXi’s leadingedge systems are linked through a FIX
gateway, providing users with instantaneous FX trading capability and live,
streaming, executable market data supplied by Hotspot
FXi’s network of top-rated bank market makers and institutional customers. For more information, visit www.portware.com.
FFastFill announced the start of its application service
in support of the new CME/Reuters service, which gives
Reuters users direct access to CME’s foreign exchange
futures and enhances the ability to trade FX spot and
38
how to place orders in a forex brokerage account. These are topics
many trading books address, but
few do as good a job at framing this
information from a personal point of
view. After reading the book, you
get a true sense of Horner’s thought
process as she goes through the
trading day.
A multimedia DVD that comes
with the book covers the technical
indicators Horner uses (a helpful
bonus given the small size of the
book’s chart examples). It gives you
a better sense of what these indicators look like, and Horner’s commentary provides more insight into
how she uses them.
Forex Trading for Maximum Profit is
a good book, particularly as a departure point for people beginning to
investigate the forex market. The
writing is concise and easy to
understand. You get the feeling
you’re in a discussion with a regular
person rather than listening to a lecture. It’s a good place for new forex
traders to start their research.
futures. FFastFill has been responsible for building and
maintaining a trade order routing service that enables
traders using Reuters to also execute CME’s FX futures contracts. FFastFill has initially signed four major institutions
—ABN AMRO, Bank of America, HSBC, and the Royal
Bank of Scotland — for this service. These CME clearing
members will not only support their internal trading teams,
but also offer a service to non-clearing member firms that
use the Reuters platform.
UPCOMING EVENTS
Event: The 22nd Annual World Cup
Trading Championship
Speakers include John Bollinger, Larry
Williams, and Frank Tirado.
Entrants will compete in separate
stock, futures, and forex divisions for
prizes, Bull & Bear trophies and a possible staff position on the worldcupadvisor.com team.
Date: June 23-24
Date: Through 2005
For more information: Log on to
www.robbinstrading.com
•
Event: The Options Industry Council
is conducting a handful of options seminars across the country this winter.
They are taught by exchange professionals in a classroom-style format and
run from 6 p.m. to 9 p.m. There is no
cost to attend.
www.888options.com for an updated
listing of seminar locations, as well as
schedules for OIC’s Covered Calls and
Directional Strategies seminars.
•
Event: The 17th Annual Las Vegas
Money Show
Event: The Traders Expo Chicago
Date: July 13-16
Location: Hyatt Regency Chicago
Location: Sofitel Hotel, Rio de
Janeiro, Brazil
For more information: www.expotrader.com.br/
For more information:
http://www.tradersexpo.com or call1800-970-4355
•
AVAILABLE NOW!
In the May issue of Active Trader magazine:
• Interview with options guru Larry McMillan
• Trading with Market Profile charts
• ETF trading — Understanding HOLDRS
• The inside scoop on automated trading
• Plus trading system design, the monthly trade
diaries, and much more.
Go to www.activetradermag.com to subscribe
or get more information.
Date: May 9-12
Location: Paris & Bally's Resorts;
Las Vegas
www.intershow.com
•
Event: First Annual European
Managed Futures Conference 2005
Finance IQ's First European Managed
Futures Conference will focus on the
risks and opportunities available when utilizing managed futures in your portfolio.
In the April issue of Options Trader magazine:
Our newest monthly magazine features
trading strategies, trading analysis, software
reviews, news, and educational articles
specifically for options investors or traders.
Among this month’s feature articles:
• Getting started in options: A primer explaining the
key characteristics of options and
different strategy types.
• New trading opportunities: The CME launches
options on E-mini stock index futures.
Date: April 21 - 22
Location: The Selfridge Hotel,
London
For more information:
www.iqpc.co.uk/GB-2440/ediary
•
Event: Expo Trader Brazil
International Asset Managers and
Traders Conference
• Event-driven straddle trading: Options expert Larry
McMillan offers step-by-step instructions for taking advantage of big moves that can
occur around earnings releases and other market events.
• Getting sentimental about options: Bernie Schaeffer takes a look at options and
sentiment analysis.
Sign up for a free subscription today (limited-time offer)
at www.optionstradermag.com.
39
KEY CONCEPTS AND DEFINITIONS
Definitions and formulas for some of the tools referenced
in this issue of Currency Trader.
Measuring the U.S. trade deficit
T
he U.S. Commerce Department’s Census Bureau
and its Bureau of Economic Analysis (BEA) jointly
release the International Trade in Goods and
Services report each month, which is a snapshot of the
U.S.’s trade balance, or the gap between its imports and
exports.
The trade balance report is one of two releases that focus
on foreign trade, but unlike the current account balance
report, which also includes foreign investment, the trade
release only tracks the goods and services imported to and
exported from the U.S.
The report isn’t as relevant as other economic indicators
because its statistics are delayed by two months (i.e.,
January’s report contains November’s data), but its monthly release is more popular than the quarterly current
account balance report. It hits the Street at 8:30 a.m. ET the
second week of the month.
Traders tend to concentrate on the overall figures for each
month (total imports and exports as well as the trade gap,
or difference between them), but the report contains 18
detailed tables that break down U.S. trade in a variety of
ways.
First, the announcement divides both
imports and exports
into either goods or services, and provides three-month
moving averages of all four categories. The report then
divides these groups further into smaller categories including six types of services, petroleum or non-petroleum
goods, and dozens of industrial supplies and consumer
products that range from nuclear materials to fruit. Finally,
the trade balance report breaks out U.S. imports and exports
by nearly 40 countries.
The Commerce Department directly tracks monthly
changes in imported and exported goods, but it uses business surveys to compile its services data. The release provides both seasonally adjusted and raw data as well as
nominal and real, or inflation-adjusted, statistics. Each
report contains revised data from previous months, and
annual revisions are released each June.
Source: Bernard Baumohl, The Secrets of Economic Indicators: Hidden
Clues to Futures Economic Trends and Investment Opportunities
(Wharton School Publishing, 2005).
The Fibonacci series
T
he Fibonacci series is a number progression in
which each successive number is the sum of the
two immediately preceding it: 1, 2, 3, 5, 8, 13, 21,
34, 55, and so on.
As the series progresses, the ratio of a number in the
series divided by the immediately preceding number
approaches 1.618, a number that is attributed significance
by many traders because of it appearance in natural phenomena (the progression a shell’s spiral, for example), as
well as in art and architecture (including the dimensions of
the Parthenon and the Great Pyramid). The inverse, .618
(.62), has a similar significance.
Some traders use fairly complex variations of Fibonacci
number to generate price forecasts, but a basic approach is
to use ratios derived from the series to calculate likely price
40
targets.
For example, if a stock broke out of a trading range and
rallied from 25 to 55, potential retracement levels could be
calculated by multiplying the distance of the move (30
points) by Fibonacci ratios –– say, .382, .50 and .618 –– and
then subtracting the results from the high of the price move.
In this case, retracement levels of 43.60 [55 - (30*.38)], 40 [55
- (30*.50)] and 36.40 [55 - (30*.62)] would result.
Similarly, after a trading range breakout and an up move
of 10 points, a Fibonacci follower might project the size of
the next leg up in terms of a Fibonacci ratio –– e.g., 1.382
times the first move, or 13.82 points in this case.
The most commonly used ratios are .382, .50, .618, .786,
1.00, 1.382, and 1.618. Depending on circumstances, other
ratios, such as .236 and 2.618, are used.
Exponential moving average (EMA)
T
he simple moving average (SMA) is the standard
moving average calculation that gives every price
point in the average equal emphasis, or weight.
For example, a five-day SMA is the sum of the most recent
five closing prices divided by five.
Weighted moving averages give extra emphasis to more
recent price action. The exponential moving average (EMA)
weights prices using the following formula:
EMA = SC * Price + (1 - SC) * EMA(yesterday)
where
SC is a “smoothing constant” between 0 and 1, and
EMA(yesterday) is the previous day’s EMA value.
You can approximate a particular SMA length for an
EMA by using the following formula to calculate the equiv-
alent smoothing constant:
SC = 2/(n + 1)
where
n = the number of days in a simple moving average of
approximately equivalent length.
For example, a smoothing constant of .095 creates an
exponential moving average equivalent to a 20-day SMA
(2/(20 + 1) = .095). The larger n is, the smaller the constant,
and the smaller the constant, the less impact the most recent
price action will have on the EMA. In practice, most software programs allow you to simply choose how many days
you want in your moving average and select either simple,
weighted or exponential calculations.
Bollinger Bands
B
ollinger Bands are a type of trading “envelope”
consisting of lines plotted above and below a
moving average, which are designed to capture a
market’s typical price fluctuations.
The indicator is similar in concept to the moving average
envelope (see Indicator Insight, Active Trader September
2002, p. 84), with an important difference: While moving
average envelopes plot lines a fixed percentage above and
below the average (typically three percent above and below
a 21-day simple moving average), Bollinger Bands use a statistical calculation called standard deviation to determine
how far above and below the moving average the lines are
placed. As a result, while the upper and lower lines of a
moving average envelope always move in tandem,
Bollinger Bands expand during periods of rising market
volatility and contract during periods of decreasing market
volatility.
Bollinger Bands were created by John Bollinger, CFA,
CMT, the president and founder of Bollinger Capital
Management (see Active Trader, April 2003, p. 60).
Calculation
By default, the upper and lower Bollinger Bands are
placed two standard deviations above and below a 20-period simple moving average.
Upper band = 20-period simple moving average + 2
standard deviations
Middle line = 20-period simple moving average of
closing prices
Lower band = 20-period simple moving average - 2
standard deviations
Standard deviation is a statistical calculation that measures how far values range from an average value — in this
case, how far prices stray from a 20-day moving average.
Statistically, 95 percent of values will fall within two standard deviations of the average value, which means 95 percent of price action should occur within the upper and
lower Bollinger Bands.
Interpretations and use
Bollinger Bands highlight when price has become high or
low on a relative basis, which is signaled through the touch
(or minor penetration) of the upper or lower line. Put another way, price is seen as relatively high (overbought) on a
touch of the upper band and relatively low (oversold) on a
touch of the lower band.
However, Bollinger stresses that price touching the lower
or upper band does not constitute an automatic buy or sell
signal. For example, a close (or multiple closes) above the
upper band or below the lower band reflects stronger
upside or downside momentum that is more likely to be a
breakout (or trend) signal, rather than a reversal signal.
Accordingly, Bollinger suggests using the bands in conjunction with other trading tools that can supply context and
signal confirmation.
41
FOREX DIARY
U.S. dollar/Japanese yen (USD/JPY), daily
Exit half of position
at 106.66
Signals from a mechanical system
contribute to a trade in
the USD/JPY rate.
107.5
107.0
Initial target
106.5
Buy at 104.12
106.0
105.5
TRADE
105.0
Date: Thursday, March 10, 2005.
104.5
60-day MA
Entry: Long the U.S. dollar/Japanese Yen
(USD/JPY) at 104.12.
104.0
8
103.5
Current close/20-day range
Reason(s) for trade/setup: This trade was
based on a system that attempts to enter in
the direction of an intermediate-term trend
when price pulls back on a short-term
7
14
basis. The system uses two simple calculations: a 60-day moving average to define
the trend and a momentum indicator to determine when the
closing price is in the bottom or top 20 percent of the price
range of the past 20 days. The market is defined as being in
an uptrend when price is above the 60-day moving average
and in a downtrend when it is below the moving average.
These values were not optimized, and were selected to
reflect price movement lying between what would normally be considered long-term and short-term time frames. The
rules were to buy when the momentum indicator crossed
from below -.80 to above (meaning price was in the bottom
20-percent of the 20-day price range) and price closed above
the 60-day moving average, indicating the market had
dropped to a relatively low level on a short-term basis while
the market was in an uptrend.
In testing, the basic signals (going long on a buy signal
and exiting, and going short on a sell signal) produced profitable, but unspectacular results. Forty percent of both long
and short trades were profitable, but long trades were much
more profitable than short trades. Also, the system tended
to get “whipsawed” in choppy market conditions, and
often gave back large portions of open profits before a
reversal signal occurred.
For these reasons, we decided to take a long trade with an
additional stop-loss rule: Exit with a loss .33 below the low
of the entry bar or the preceding bar, whichever is lower.
Initial stop: 103.32, which is .33 below the low of the day
before the entry bar.
Top 20%
0.2
0.4
Bottom 20%
21
28 March
7
14
21
28
Initial target: 106.66, which is .20 below the Feb. 10 high.
We’ll take partial profits at this level and trail a stop on the
remainder of the position.
RESULT
Exit: 106.66 (half of position).
Reason for exit: Market hit initial profit target.
Profit/loss: +2.52 (2.4 percent).
Trade executed according to plan? Yes.
Lesson(s): The market shot above the price target on
March 28, trading as high as 107.37; we exited half the position at our price and will use a stop .20 below the low of the
most recent bar (106.26) to protect the remainder of the
position. This might seem like a tight stop, but the current
(March 28) bar is a fairly wide-range bar, which puts the
immediate stop level much farther away (at the current
price levels around 107.20) than the initial stop amount.
Trading systems don’t necessarily have to be traded
“mechanically” to have value. We adapted facets of a trading system as a trade trigger, and added rules based on the
market’s recent performance and characteristics.
TRADE SUMMARY
Date
Rate
Entry
Initial
stop
Initial
target
IRR
3/10/05
USD/JPY
104.12
103.32
106.66
3.18
Exit
Date
106.66
3/28/05
(1/2 position)
P/L
LOP
LOL
Trade
length
+2.54
(2.4%)
3.2
.42
12 days
Legend: IRR — initial reward/risk ratio (initial target amount/initial stop amount); LOP — largest open profit (maximum available profit
during lifetime of trade); LOL — largest open loss (maximum potential loss during life of trade).
42

why the deficit doesn`t matter why the deficit doesn`t matter

Transcription

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